Wednesday, November 30, 2011

To Read:

71 Comments:

Blogger Ramanan said...

He he ..

I will also recommend some really old stuff from Marc Lavoie from the UMKC course site:

http://cas.umkc.edu/econ/economics/faculty/wray/601wray/the%20dynamic%20circuit.pdf

esp "Loans Make Deposits" ...

http://cas.umkc.edu/econ/economics/faculty/wray/601wray/the%20endogenous%20flow%20of%20credit.pdf

Has good references from authors from Fed during the Volcker era.

(of course I recommend all his writings including the few in French which I may read sometime!).

12:47 PM  
Blogger wh10 said...

:)

I am going to repost here what Fullwiler posted over at Heteconomist, which is his response he sent to Lavoie.

"Hello all,

Interesting discussion. I don’t have time to post original thoughts right now, but as an FYI, I sent my comments to Marc after seeing the paper. He has adjusted a subsequent draft somewhat. Here are my comments (with a few deletions due to privacy):

2. Regarding Febrero’s paper, my main concern there was the points made in criticism of neo-Chartalism (NC) either are misrepresentations of NC (i.e., using the Eurozone as an example to disprove NC) or complete misinterpretations (NC’s view of govt controlling the price level and “leverage”). To quote others who have had the same disagreements did not represent new scholarship.

3. “Vertical” money doesn’t mean the same thing as inside money or the monetary base. Vertical here means net financial assets of the non-government sector, which by accounting identity equal currency+reserve balances + Treasuries-loans from the cb and/or govt to the non-govt sector. In other words, there definitely is something different being said when we say “vertical” than was said previously by endogenous money folks, etc. That said, I can see where there has been some confusion in interpreting the NC view here, as some of the literature has certainly used terminology that might have reasonably been interpreted that way—but I do think a careful reading (and recognition of the “general case” that I will refer to below) does make the point clearly. It is interesting that those in the NC camp have always understood what we meant and those outside NC have always interpreted NC literature differently on this point—looks like room for discussion here, particularly since I think we all agree on how this works if we do in fact sit down and agree on terms first. I want to just add that Mosler’s paper from 1997 (“Full Employment and Price Stability”) was very clear about net financial assets (NFA)—perhaps that’s why we all “got it” and others didn’t (??) http://moslereconomics.com/mandatory-readings/full-employment-and-price-stability/) . (Marc subsequently changed the paper to include Warren’s paper with Mat on the H-V approach, http://moslereconomics.com/mandatory-readings/a-general-analytical-framework-for-the-analysis-of-currencies-and-other-commodities/)

4. Regarding leverage, it’s always been a mystery to me how the horizontalists have been so against this terminology. We are using “leverage” the exact same way that it is used in accounting and financial management—indeed, it’s the same way that all the corporate finance textbooks I use teach it. That is, leverage to NC refers to a leveraging of the balance sheet, as in assets divided by equity—the “equity multiplier” or “leverage” (my students have to learn that this measure is called “leverage” since that’s what the business simulation we use calls it, for instance). In other words, “leverage” here has nothing at all to do with leveraging reserves as in the money multiplier, and it has nothing at all to do with suggesting that reserves or anything else are a priori necessary for leverage to occur. To bring this together with vertical money or NFA, the point of “leverage” as NC uses it is to describe leveraging of NFA, again as an expansion of debt leverages existing equity (in fact that’s exactly what we mean, since NFA are equity for the non-govt sector). Note that some folks commenting on the blogs that are highly skilled with accounting have from the start been completely on board with NC on NFA, vertical money, and leverage [in terms of how] NC defines and uses these terms.

I would want to add, then, here that I think that at least from the NC perspective part of the problem with points 3 and 4 has been that horizontalists seem to have interpreted NC from a rather narrow lens of overreacting to anything that might sound like monetarism if one doesn’t investigate too carefully what is actually being said."

TO BE CONTINUED

2:52 PM  
Blogger wh10 said...

CONTINUED...


"5. Most of your points of criticism are related to what I have come to call the “general” vs. “specific case” framing inherent in the NC literature. In short, much of the core NC literature has been describing a “general” case, while most of the critics have been pointing to “specific” or “special” cases. I think NC literature has driven this confusion at times—it was a new paradigm trying to define itself, afterall, and started off at times a bit sloppily perhaps or at least said things in a way that would later be refined—since I don’t think there’s been a lot of clarity on this point. I explained this in some detail in a post I did to Naked Capitalism last fall– http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1723198 Also, for this reason what sounds to you like NC backtracking is from the NC perspective an attempt to clarify the “general” vs. “special” or “specific” case distinction that obviously wasn’t understood by the critics previously.

6. I think you hit an important point when you ultimately point to the importance of the interest rate on the national debt as the core issue (which you very carefully and skillfully get at through analysis of the overdraft/settlement system—that was fantastic!), though perhaps at times NC has focused on other things that you think are less important overall. As you know, this has been my perspective, too, which I explained carefully in “interest rates and fiscal sustainability” (JEI, 2007; wp version at ssrn) and then again at the end of the link above). Then you further mention your paper with Wynne on the importance of the fiscal policy rule. We discussed previously how your paper actually demonstrated that a functional finance fiscal policy rule was in fact Ricardian, which might even be more important than the interest rate, depending on how one sets up a model’s assumptions. I agree and made both points in my critique of Paul Krugman’s criticism of MMT (originally posted to Naked Capitalism and also provided a link to your paper with Wynne) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799068

7. As above, the “consolidated Treasury/Central Bank” should be thought of as a “general” case. I personally have never used this—I don’t find the idea that the Treasury would have an account at the central bank to be analytically limiting even in the general case if we understand how the hierarchy of decision making (i.e., who has the policy control over whom?) and the hierarchy of money are necessarily situated in the “general” case NC is describing. My approach here combines my link above in 5 with this newer piece on the specific case of the US– http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1825303 –this uses the SFC/SAM modeling you and Wynne did so well)"

2:52 PM  
Blogger Hugo Heden said...

Oh dear, this discussion is never gonna end, is it? :-)

3:13 PM  
Blogger Tom Hickey said...

@ Hugo

The argument will end when everyone involved understands the issues and positions. Then there will either be agreement or disagreement.

If there is agreement on facts that can be checked but disagreement remains, then the disagreement will be over decision criteria.

What is happening now is a process of clarification. This is an important step forward.

3:34 PM  
Blogger Hugo Heden said...

Agreed.

11:41 PM  
Blogger JKH said...

Tom,

“If there is agreement on facts that can be checked but disagreement remains, then the disagreement will be over decision criteria.”

Not sure where you’re coming from there, or what “decision criteria” means.

Whose decisions and regarding exactly what?

Lavoie’s paper was almost entirely about form/style of presentation of the facts, not the facts themselves, as were my own comments, which I finally summarized for Scott on the previous thread.

As far as accuracy of comprehension of the facts is concerned, Lavoie is probably in the .00001 per cent and Fullwiler in the .000001 per cent.

I’d recommend distinguishing between interpretation/presentation of the facts, the implied or explicit marketing of such presentation, and the marketing of ideology and policy, all as they relate to MMT.

Scott’s paper is an interpretation and presentation of the facts according to MMT.

Lavoie’s paper is a critique, and in effect a criticism of the implied marketing of the facts as presented by MMT. (E.g. note his comment regarding student comprehension.)

Neither paper relates directly to the marketing of ideology or policy, insofar as those aspects relate to the overall MMT movement.

So again, whose decisions and regarding exactly what?

4:09 AM  
Blogger STF said...

Hi JKH,

"Lavoie’s paper was almost entirely about form/style of presentation of the facts, not the facts themselves, as were my own comments, which I finally summarized for Scott on the previous thread."

Thanks. I also was looking over your comments from earlier threads and will try my best to post again later tonight. And I agree with the first part of your sentence, though I was interpreting Tom's comments differently--I was assuming "decision criteria" in his comment referred to necessarily subjective views on these matters (what the "best" definition of currency issuer/user is, etc.). Perhaps I'm misinterpreting.

Best,
Scott

5:16 AM  
Blogger beowulf said...

Maybe the first step is consolidating terminology. A Treasury obligation is called debt, while a bank obligation is called a deposit. Banks are rarely adverse to increasing deposits even though every dollar deposited puts it another dollar in debt.
Back in the day (as in the Civil War), the govt did issue certificate of deposits (you could take your paper US Note and trade it in for a CD).
http://www.law.cornell.edu/usc-cgi/get_external.cgi?type=statRef&target=date:nonech:142statnum:12_532

Maybe Tsy should stop issuing debt and start issuing CDs again. Spend with US Notes (paper or electronic) and go back to issuing fixed rate Tsy CDs to all takers. After all, the larger the deposit base of the safest bank in the world (motto: "We insure the FDIC"), the bigger the vote of confidence in the US Govt.

8:06 AM  
Blogger beowulf said...

One other point, I'd be remiss not to mention Teddy Roosevelt's Tsy Sec. LM Shaw, the patron saint of Tsy-Fed consolidation ("Shaw ruled that the depository banks were a part of the Treasury"). :o)

"Shaw used an interpretation of the laws governing federal moneys to sanctify his actions. One (constitutional) law states: “No
money shall be drawn from the Treasury but in consequence of appropriations made by law.” Prior to 1903, internal revenue receipts
could be deposited in national bank depositories only as they accumulated, while customs receipts (about 40 per cent of total revenues) had to be held by the Treasury.
Shaw ruled that the depository banks were a part of the Treasury. Movement of funds into the banks or out of them from the subtreasuries,
therefore, was not money drawn from the Treasury, but a transfer of the money from one “apartment” to the other."

webcache.googleusercontent.com/search?q=cache:oUfMW9fzBwcJ:qje.oxfordjournals.org/content/77/1/40.full.pdf

8:16 AM  
Blogger Tom Hickey said...

STF wrote: "I was interpreting Tom's comments differently--I was assuming "decision criteria" in his comment referred to necessarily subjective views on these matters (what the "best" definition of currency issuer/user is, etc.).:

Yes.

I have written in a previously in various places that from the point of view of analytic philosophy, the major purpose of a philosophical investigation is to clarify the logic, not the facts, which is a scientific matter. If there is a dispute after the verifiable facts have been adduced, then the dispute is over the logic — "logic" here being used in the wider sense characteristic of Wittgenstein, for example.

MMT is presented with two major challenges. The first is providing an explanation in economic terms for peers in published literature. The second is presenting MMT to the public in a simplified way that non-economists can understand and non-economist MMT proponents can promulgate with a sufficient degree of precision to make it acceptable to economists. Obviously, the gap between professional and non-professional communication can never be completely closed, but it needs to be minimized as much as possible.

That said, I think that MMT economists have to be criticized on what they write professionally, not regarding what they may say for popular consumption in simplified terminology that is not meant to be completely precise in the interest of broader understanding. However, I think that it is entirely fair and contributory to point out where this communication with non-economists can be improved upon, as well as where non-economists MMT proponents may be stepping over the line into misrepresentation.

In the final analysis, I think that disagreements will remains among professional economists because of different ideological norms and presuppositions. They don't seem to be going away.

Those norms and presuppositions are the relevant decision criteria. They are relative and subjective to the extent that there are no further criteria available for settling disputes. When the argument gets to the ideological level, all the participants can do is politely agree to disagree with they run up against respective boundary conditions.

9:22 AM  
Blogger Tom Hickey said...

Beowulf: "Maybe Tsy should stop issuing debt and start issuing CDs again. Spend with US Notes (paper or electronic) and go back to issuing fixed rate Tsy CDs to all takers. After all, the larger the deposit base of the safest bank in the world (motto: "We insure the FDIC"), the bigger the vote of confidence in the US Govt."

Good one. Making interest available to the public for public purpose through CD's would eliminate the subsidy issue from Tsy issuance.

9:26 AM  
Blogger JKH said...

Tom,

So the question is - do we have or do we not have “Tractutus Logico-MMT”?

I particularly like this part:

“Whereof one cannot speak, thereof one must be silent.”

Reminds me of consolidation.

:)

10:36 AM  
Blogger beowulf said...

Tom,
And there'd be no need to make it an auction, Tsy sets rate and anyone from a sovereign wealth fund to a retired school teacher could deposit as much as they want at the offered rate. Since Tsy would spend with US Notes and the Fed would peg policy rate with IOR, it wouldn't matter (in terms of "paying for spending") if Tsy ends up with $5 trillion in deposits or $20 trillion, let the market decide! :o)
Here's a 2% Postal Savings System CD from 1941.
http://www.postalmuseum.si.edu/museum/1d_PostalSavings-4.jpg

12:11 PM  
Blogger JKH said...

Beowulf,

"Maybe Tsy should stop issuing debt and start issuing CDs again."

So Treasury becomes a bank.

(A mismatched bank, with a net liability position).

That's a variation on "institutional consolidation".

Also a variation on MMT "no bonds".

12:30 PM  
Blogger JKH said...

Scott,

Quick re your Lavoie response:

Not sure I completely understand your views on “consolidation” as logic, but NFA is inherently a consolidation concept (a combination of CB and TR liabilities).

12:47 PM  
Blogger Hugo Heden said...

> "Not sure I completely understand your views on “consolidation” as logic, but NFA is inherently a consolidation concept (a combination of CB and TR liabilities)."

Ah..

So, if one rejects the consolidated government abstraction, logically one should not be using the NFA concept either

(?)

1:42 PM  
Blogger beowulf said...

And a variation of Shaw's 'my father's bank has many apartments' theory of of Tsy operation. :o)

And a variation of Lincoln's greenback system (how kickass was Abe Lincoln he put HIS OWN PICTURE on the ten dollar bill-- the balls on that kid). :o)
http://www.coinlink.com/News/wp-content/uploads/2010/12/fr10a.jpg

1:53 PM  
Blogger Tom Hickey said...

@ JKH

I read the Tractatus as an elucidation of the logic of description. LW is claiming that descriptive logic can only be used to describe a world other than itself, and it cannot serve to describe itself. In the Philosophical Investigations LW later claimed that the complex workings of logic can be elucidated even though this cannot be described. I read the PI as an elaboration on the TLP, the focus of which was on description. There are many other uses of language in addition to description, all with their "deep grammar," as the PI seeks to show.

I personally don't see any problem with the way that MMT professionals describe formal and informal consolidation, e.g., wrt to Treasury and Fed ops, and I would say that their work in this regard is predominantly factual rather than counterfactual. I am not privy to how the Fed and Treasury actually work day to day, but I would suppose that such assertions can be checked for accuracy.

Where I see problems arising is in different ways of framing economics. LW gives as an example the Gestalt that can be seen as either a duck or a rabbit. It doesn't have to be seen exclusively as either.

For example, some see the Treasury actually needing to borrow because due to the no overdraft requirement that forces Treasury issuance before the Treasury's deposit account can be credited with reserves by the Fed. On the other hand, MMT economists look at it from the viewpoint that reserves transferred from the Treasury's account to non-government reserve accounts are necessarily drained into Tsys due to the deficit offset account.

One side emphasizes temporal priority and the other side logical priority. I consider this as two ways of viewing essentially the same events. MMT economists have no difficulty seeing the temporal priority or Tsy issuance before deficit spending along with the logical priority of "spending preceding "borrowing" in the sense that non-government reserve injection is logically prior to the reserve drain into tsys that alters the composition and of non-government NFA and term structure of govt liabilities. Others seem to have trouble with seeing this and insist that temporal priority applies exclusively.

4:35 PM  
Blogger JKH said...

Thanks, Tom. I've only looked at the Tractatus a couple of times. It reads almost like a philosopher/ accountant's record of debits and credits for reality.

It also reminds me that I once took a course from this guy:

http://en.wikipedia.org/wiki/Joachim_Lambek

And finally it also reminds me a wee bit of Scott's papers on monetary operations.

7:04 PM  
Blogger JKH said...

TH,

On the temporal argument, where I’ve ended up is this:

What is necessary and sufficient is that the central bank must provide reserves in order for taxpayers’ banks to pay taxes as their agents.

(CB notes work as well, whether viewed as temporary reserves or not.)

It is not necessary for the government to run a deficit in order to do this. The CB can just lend.

I’d describe these things as operational aspects of the monetary system.

But I don’t like the extension of the meaning of “spend” to CB lending. I think it’s misleading, in that it suggests sympathy for deficits, for what really is the wrong reason. There are strong reasons in favour of deficits that are entirely separate from this. So that’s an aspect of “form” that I’d prefer be changed.

7:27 PM  
Blogger Tom Hickey said...

@JKH

Right. A key point of Chartalism is that non-government has to obtain state money to satisfy its tax obligations, which allows the state to transfer private resources for public use through providing state money. The state could do this through the CB via the existing bank lending procedure, or even through directed CB lending if that were permitted, so that those with tax liabilities would have to borrow to obtain the needed state currency. This would create an interest obligation in addition to the tax obligation.

Of course, the credit channel is not the only way to get currency into non-government hands in sufficient quantity to pay taxes. Government can and does provide reserves that show up in private deposit accounts through its payments, which result in injection of non-government NFA and a net add in the case of deficits.

How taxpayers get access to those reserves needed to satisfy their obligations to government is rather crucial, and I think that is the MMT point in emphasizing vertical and horizontal. Unless the government fiscal balance is in surplus, government injects at least enough reserves to meet tax obligations through its payments, and any excess reserves get drained into tsys due to the required deficit offset.

However, in the case of surpluses non-government could be forced to net borrow privately to meet its government-imposed obligations. Unless this leakage were offset by net exports, the result would be result in either decreased non-government saving or economic contraction.

If I have stated this correctly, doesn't MMT lay this out pretty specifically?

7:59 PM  
Blogger JKH said...

TH,

My point was on form.

The order usually presented by MMT is deficit spending provides the reserves, and oh by the way lending does as well, and which oh by the way we also call spending.

The logical order is that lending is sufficient, and deficits are not required.

And lending is not spending.

And lending should not be called spending in my view, because it is fundamentally important to MMT and anybody else who’s interested in the monetary system to understand that asset swaps (of which lending is a form) are not the same as deficit spending. These two things have fundamentally different financial and economic impacts, and this difference is fundamentally important to MMT, given among other things its emphasis on NFA. So I’m suggesting MMT is risking self-foot shooting on an important communication issue, by extending the spend vocabulary to CB lending.

8:36 PM  
Blogger JKH said...

BTW, just in case anybody suggests we're not making progress with these types of discussions over the past few days, have a look at this and weep:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/12/blue-sky-money-two.html

8:42 PM  
Blogger STF said...

JKH,

Who ever called CB lending spending? I haven't seen that before, or overlooked it, or interpreted it differently. But calling lending spending, if it's that simple, doesn't sound like the sort of thing the MMT economists I know would do. We've been very clear that any CB action is absolutely not the same thing as spending, in my opinion, but maybe you have a quote that's central to the MMT literature I haven't seen to demonstrate your point.

Also, regarding NFA and consolidation, recognize that Lavoie is completely on board with NFA (he wrote a book with Godley, after all), but not on board with consolidation. So at least he would seem to disagree with you.

Best,
Scott

8:46 PM  
Blogger Andrew Rogers said...

This comment has been removed by the author.

8:51 PM  
Blogger JKH said...

Scott,

I thought Mosler had from time to time, maybe Mitchell. Maybe I'm wrong; but that’s what I associated at the time.

Also, from your paper:

'This all leads me to the often noted MMT point that "spending comes before tax revenues are received or bond sales." If one expands this a bit to include loans from the Fed, then this statement is absolutely correct in terms of the operational realities of the monetary system.'

I read that as spending includes lending. That's probably a misread, but the reinforcing "this statement is absolutely correct" tends to make that a bit blurry.

Anyway, the point of logic remains. The logic is not that deficits are required to supply the reserves, but the opposite – deficits are not required.

9:12 PM  
Blogger JKH said...

On the spending/lending thing, its possible I've misread it all the way through, from everybody. But I have no reason to do that. So if that's what I've done, maybe where the two are mentioned together, it could be clearer.

9:19 PM  
Blogger JKH said...

And to be clear, obviously I know that MMT'ers know that there is a difference between the two things in the normal meaning of each. I'm saying I've seen a tendency to extend "spend" to lending, in some manner of speaking/writing, in connection with the explanation of this reserve issue.

9:25 PM  
Blogger JKH said...

Scott,

Lavoie and I seem to have the same general impression on both aspects of the spend/lend issue discussed above:

“Another problematic statement is that the government has to run deficits, at least over the long run, for the public to get access to larger cash balances ... even if the government keeps running balanced budgets, central bank money can be provided whenever the central bank makes advances to the private sector ... presumably, what he has in mind, as we will see soon, is that total government expenditures include “spending” by the central bank, when the central bank purchases private assets or claims on the private sector and adds them to the asset side of its balance sheet. But this is an odd way to define government spending.”

Bit of a coincidence of misinterpretation, if there are no other explanatory factors for it.

9:40 PM  
Blogger JKH said...

Scott,

I agree with Lavoie on both NFA (that it is a useful construct) and consolidation.

On consolidation, I agree with every word he says here:

“Now, in itself, such a consolidation is not illogical ... but such an integration may not be appropriate for the purpose at hand, as it adds to confusion to a reader who is already having a hard time understanding the mechanics of the clearing and settlement system, and who has been accustomed to distinguish the government and its central bank... If we accept to consolidate the central bank and the government into one entity, then some other highly controversial claims make more sense.”

If somebody wants to point to a comment I’ve made anywhere that they believe is inconsistent with this, I’ll respond.

9:48 PM  
Blogger Tom Hickey said...

JKH quoting ML: "presumably, what he has in mind, as we will see soon, is that total government expenditures include “spending” by the central bank, when the central bank purchases private assets or claims on the private sector and adds them to the asset side of its balance sheet. But this is an odd way to define government spending."

I think that MMT makes a crucial distinction here. When the CB buys Treasury securities it is conducting a monetary rather than a fiscal operation, i.e, merely changing composition and term of presently existing non-government NFA without increasing or decreasing the total. However, should the CB purchase non-government private assets, then this is a fiscal operation since it is changing the total of NFA held by non-government.

This is "spending without spending," since government expenditure requires congressional appropriation according to Article I, Section 8, Clause 1 of the United States Constitution, known as the Taxing and Spending Clause. It is an end-run around Congress that stretches the power of the Fed to the limit. Consequently, it would probably be used only in extraordinary circumstances, since it would likely set off alarm bells in Congress that they had delegated too much of their power.

But some view this gambit as what Bernanke intends to do as an actual helicopter drop if QE 3 or 4 becomes necessary. If he chooses to do so, he will do it and ask permission later, claiming justification under the Fed's emergency powers.

Is this "spending"? If not, what?

8:21 AM  
Blogger Tom Hickey said...

JKH quoting ML: "“Now, in itself, such a consolidation is not illogical ... but such an integration may not be appropriate for the purpose at hand, as it adds to confusion to a reader who is already having a hard time understanding the mechanics of the clearing and settlement system, and who has been accustomed to distinguish the government and its central bank... If we accept to consolidate the central bank and the government into one entity, then some other highly controversial claims make more sense.”"

First, MMT economists have always distinguished formal from informal consolidation. In the US, the Fed is formally independent, and monetary policy is conducted entirely separate from fiscal policy, which is the province of Congress through the budgetary process. However, MMT professionals also observe that monetary and fiscal policy are "informally consolidated" in that the Fed and Treasury work in close communication and cooperation to manage monetary and fiscal operations on a day to day basis, so the the objectives of both entities, which are formally separate, and met harmoniously.

MMT economists have never suggested that the Treasury is presently involved in setting monetary policy, however, or that the Fed is involved in establishing fiscal policy. Both the Fed chair and the Treasury secretary are careful to observe this boundary in what they say publicly.

Some MMT professionals seem to think that formal consolidation of the Fed and Treasury would be a good thing. I have not seen a detailed presentation of what that would look like, however. Randy Wray seems to be developing in this direction at his Economonitor blog. Dennis Kucinich has recently proposed formal consolidation in a recent bill that would effectively "abolish the Fed."

Similarly, Ron Paul who wants to abolish the Fed and put monetary policy under the control of Congress.

Abolishing the Federal Reserve will allow Congress to reassert its constitutional authority over monetary policy. The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. — Ron Paul, Abolish the Fed.

The push on both left and right periphery is to consolidate monetary and fiscal policy under Congress, and the peripheries are expanding.

8:42 AM  
Blogger Ramanan said...

Tom Hickey,

"However, should the CB purchase non-government private assets, then this is a fiscal operation since it is changing the total of NFA held by non-government. "

Not sure what this means and I am not sure who said this or the opposite.

If the central bank purchases assets which are not Treasury securities, it is still exchanging one asset for another. No change in NFA.

It can have effects, such as the security paying a higher coupon, or the security changing its value (i.e, revaluation) and this may have some changes in NFA at a future point in time.

For example, if the issuer defaults, it is a transfer to the private sector from the government sector, but in the future.

Do not confuse creation of monetary base with creation of NFA for the private sector.

"This is "spending without spending,"

Not sure what this means.

At any rate, I do not understand the relevance of your comment @ 8:21 AM

9:07 AM  
Blogger Ramanan said...

I guess I know the source of confusion.

Recently Bill Mitchell mentioned that purchases of private sector securities by the government is spending when he was discussing the future fund (?)

It's inaccurate terminology.

9:13 AM  
Blogger JKH said...

“However, should the CB purchase non-government private assets, then this is a fiscal operation since it is changing the total of NFA held by non-government.”

That’s just wrong, regarding NFA.

Non government holds a financial asset (reserves).

Non government issues a financial liability (borrowing from CB).

Gross financial assets increase, NFA doesn’t.

NFA requires an equity (net worth) increase on the RHS of the consolidated non government balance sheet.

The fiscal classification, whether correct or incorrect, is irrelevant to the NFA truth.

(TARP, as a monetary operation conducted by Treasury, was incorrectly classified as fiscal.)

9:26 AM  
Blogger JKH said...

Mosler classifies CB FX purchases as "spending" or "fiscal" or something like that. That's a special case, requiring special attention and treatment, because it strays outside the domestic currency in question that is being issued. I imagine there are arguments either way on that one. Its an exception in treatment as a non government asset, and although its an exception in that sense its not an exception in the sense of same currency NFA, etc.

9:38 AM  
Blogger Ramanan said...

JKH @9:26 AM,

Same point as me :)

@9:38

I don't know why he says so. It doesn't add to income for the other sector. I have never seen any country's national accounting doing so.

Also see my point @9:13 AM.

9:45 AM  
Blogger STF said...

"Mosler classifies CB FX purchases as "spending" or "fiscal" or something like that. "

No he doesn't. He says if there is a default then it's like fiscal, just as Lacker recently said.

12:25 PM  
Blogger STF said...

Actually, I didn't read Lacker closely, so it may not be the same thing. I was assuming. But Mosler's point is the same one I made in "helicopter drops are fiscal operations"--if the CB lends and the loan is defaulted upon, this is a creation of NFA.

12:28 PM  
Blogger STF said...

JKH @9:48

I have no problem with that. That's generally my position, too, actually.

12:31 PM  
Blogger STF said...

I was assuming you (JKH) were referring to currency swaps with other CBs. Perhaps not. If not, then I would generally agree with you and Ramanan, with the caveat that I haven't seen the actual wording by Warren that is in question (particularly given that I know Warren knows better).

1:02 PM  
Blogger STF said...

A cb purchase of a pvt bond does not change NFA of the non-govt sector.

What Tom might be referring to is the fact that NFA = Treasuries held by pvt sector + currency + reserve balances - CB loans to pvt sector. So, since a cb purchase of a pvt bond is like a loan, that might appear to be a decrease in NFA. But the purchase of the bond adds reserve balances, so that offsets the fact that the CB now owns pvt debt.

1:11 PM  
Blogger Tom Hickey said...

@ Ramanan, JKH,

Regarding private assets purchases, I have seen it suggested that the Fed can buy up assets across the board, including physical RE in addition to financial assets like corporates and equities for a helicopter drop in extremis. As Scott observes, buying up dodgy financial assets that default increases NFA. Were the Fed buy junk bonds and shares in near-bankrupt firms, this would almost certainly happen to some degree. Purchases of real (non-financial) assets like foreclosures would also increase NFA. It appears that the Fed has the power to do this under its emergency powers. While the Fed has never suggested this to my knowledge, others have of late. Would the Fed do this to prevent what it perceived as impending deflation and depression? Remains to be seen. But it seems to be a possible scenario, and some apparently regard it as a plausible one. That seems like "spending" that thwarts the budgetary process to me. I would also say that lending when default is virtually certain is also quasi-spending, and it appears that the Fed may already have done some of that in its bond purchases in QE1. Some have charged that this is the case, anyway, but I don't know whether it has been confirmed.

1:26 PM  
Blogger winterspeak said...

I do not believe that the Fed can buy private assets. I think they are limited in what they have authority to purchase.

1:46 PM  
Blogger Ramanan said...

Tom Hickey,

1. Yeah even I went into the possibility of the bond defaulting in my comment @9:07 AM

2. Since you were comparing it to purchases of Treasury securities, I though you were talking of discussing financial assets mainly. Even if you weren't a qualifier was necessary.

3. Even James Tobin discussed the Fed purchasing corporate bonds and equities and the Bank of Japan does that. So does the Bank of England I believe. The ECB purchases covered bonds. However nobody with good knowledge says they are "spending"

The Fed purchases agency MBS which is like a private sector security. But its not "spending"

4. I do not know the relevance of your comment.

5. If some real assets need to be purchased for some reason (such as preventing a fall in house price), it will most likely be done by the government, not the Fed IMO.

1:57 PM  
Blogger Ramanan said...

STF @ 1:02 PM,

I was referring to outright purchases of foreign exchange by a central bank, rather than the Fed's currency swaps. There are many places where WM calls the former "off balance sheet deficit spending"

2:00 PM  
Blogger Hugo Heden said...

Might be interesting for you guys to hear my views on this, me being a rookie. (This adds nothing new to what you already know, but reveals what MMT has been able to communicate into a beginner's brain.)

To me, MMT quite clearly separates "fiscal" from "monetary", "spending" from "lending", "NFA injections" from "assets swaps".

Whatever adds NFA is "fiscal" operations. "Money things" are being "spent" into existence. Helicopter drops are fiscal.

"Monetary" operations -- money things are "lent into the economy" (rather than spent). Typically performed by a Central Bank. That does not add NFA. OMO does not add NFA. CB purchasing private financial assets does not add NFA either (in general, with caveat below).

Those are the simple, clear cases.

Now, there are grey areas too:

* Financial assets denominated in foreign currencies are purchased by the CB. This does add NFA -- provided that one is talking about NFA denominated in the domestic currency only. (Whatever definition of NFA one is using is preferably spelled out.) The Chinese CB's hoarding of dollar assets is a peculiar instance within this grey area.

* Private financial assets with considerable default risk are purchased by the CB is also in the grey area. Basically, it is a monetary operation, as it does not add NFA (nominally, at the point of the purchase). However, it seems reasonable to call that a quasi-fiscal operation. Any CB purchase of private financial assets above market price could be considered fiscal (or "quasi-fiscal"). (Wasn't QE1 like that?)

2:51 PM  
Blogger JKH said...

Ramanan,

Right, same point, and view, as often happens with us, roughly speaking.

Scott,

I was referring to purchases of FX for reserves (as Ramanan was before me), not dollar swaps.

Note I qualified my reference to Mosler with “something like that”. I’m fairly confident the evidence would support my statement, although I can’t cite anything specific right now. It’s a minor point anyway.

“He says if there is a default then it's like fiscal”

Right – and it’s also true more generally that any subsequent income effect from any monetary policy transaction is fiscal. That extends to recording the income accrual on Treasuries for accounting purposes, with no associated transaction. Income accounting for the Fed is fiscal – dare I say it - when you consolidate the income books of the Fed with the books of Treasury on an accrual accounting basis (which I expect is actually done in practice at Treasury on a monthly basis).

“If the CB lends and the loan is defaulted upon, this is a creation of NFA.”

Yes, good one. The default is a loss to the Fed, which a reduction in profit remittance to Treasury, which is an increase in the deficit, which is a creation of NFA.

I'm happy you agree with my 9:48!

“With the caveat that I haven't seen the actual wording by Warren that is in question (particularly given that I know Warren knows better).”

I’ve seen something on it, but I can’t remember it exactly. Again, it’s purely a style issue of language and classification.

BTW, I’ve had some 1:1 discussions with Warren on his blog regarding issues where he and I definitely disagree. This isn’t one of them, although I’ve set it aside for future revisiting. I don’t doubt his view on it, I just don’t know yet if I fully agree.

(The issues of disagreement include TARP, dollar swaps, and bank capital.) No big deal. I go there occasionally and vent, he responds, we debate, and then I go away. We both hold to our views. I’m generally admiring of his willingness to engage and respond with great patience to most people on his blog.)

Tom,

I have noted in the blogosphere a general willingness and eagerness for those blogs that in particular are either left wing oriented (meaning most of them) and/or "end the Fed" oriented, to confuse risk and loss at the analytical level. (Note this is NOT a criticism focusing on MMT, although I do regard it as somewhat left leaning, since my complaint goes far, far beyond the MMT sphere.)

The typical argument is that the Fed has acquired “dodgy assets” which are “worthless” and therefore that transaction activity is fiscal. This is pure crap in all its analytical dimensions. There may be good arguments pro and con for the Fed expanding into risky assets, but not because it is fiscal. As in my point to Scott above, the fiscal effect is always an effect of return or loss – not of risk. And the act of asset acquisition or lending is an act of risk, not of return or loss. The return or loss comes into play through accounting accruals and/or transactions that crystallize marked to market gains or losses.

Scott, Tom,

Helicopter drops are different from my just previous comment, because they generate an immediate fiscal effect, since they are not asset swaps. The transaction generates NFA in its very substance, so it is fiscal.

Winterspeak,

You are correct of course on the existence of some general restrictions on normal course asset purchases.

4:31 PM  
Blogger JKH said...

Hugo,

Looks very good to me!

I’d be a bit stickier on your final fiscal point, as per my last comment.

On your penultimate NFA point, I think I’d define two sources of domestic currency NFA:

a) Domestic currency NFA generated through domestic currency fiscal effects
b) Domestic currency NFA generated through GFA currency swaps

That second one is “gross financial asset currency swaps”, meaning swaps of domestic currency for foreign currency, meaning FX reserves for example.

But I would not classify GFA currency swaps (e.g. FX reserves) as fiscal.

However, I would classify them as domestic currency NFA, because the consolidated NFA profile held by non government is increased by domestic currency reserves in the first instance, for example.

Finally, the effect of GFA currency swaps on global NFA is zero. Domestic currency NFA increases, offset by a decrease in foreign currency NFA in respect of the foreign currency issuer.

5:18 PM  
Blogger Tom Hickey said...

Mortgage QE?
TF Market Advisors (Dec 2)

5:42 PM  
Blogger Tom Hickey said...

JkH: "The typical argument is that the Fed has acquired “dodgy assets” which are “worthless” and therefore that transaction activity is fiscal. This is pure crap in all its analytical dimensions. There may be good arguments pro and con for the Fed expanding into risky assets, but not because it is fiscal. As in my point to Scott above, the fiscal effect is always an effect of return or loss – not of risk. And the act of asset acquisition or lending is an act of risk, not of return or loss. The return or loss comes into play through accounting accruals and/or transactions that crystallize marked to market gains or losses."

No argument with that. But what about the case where default is virtually certain. It's premeditating underwriting of the loss with plausible deniability ("just assuming risk).

5:46 PM  
Blogger JKH said...

P.S. to 5:18

GFA currency mismatches that do not intersect with the government sector, and that therefore exist entirely within the non government sector, cancel out. E.g. if the Canadian private sector has a bilateral position with the US private sector whereby Canada is long the US dollar, then the US private sector is short the dollar against Canada. While each of these is arguably a currency NFA position, the two cancel when the non government sector is consolidated relative to the issuer of the Canadian dollar.

5:47 PM  
Blogger JKH said...

"No argument with that. But what about the case where default is virtually certain."

That's the left leaning bias of pessimistic certitude that I referred to.

There's no objective evidence that default risk isn't priced properly into the transaction at the outset. You have to wait to see how the deal performs, superior or inferior to the risk assessment that was priced into the transaction at the outset.

5:53 PM  
Blogger Tom Hickey said...

JKH: "The typical argument is that the Fed has acquired “dodgy assets” which are “worthless” and therefore that transaction activity is fiscal. This is pure crap in all its analytical dimensions."

Maybe it's crap from an analytic dimension. I would call it an accounting mirage. Mish just pointed out today that the fall in the official U3 figure to 8.6 when the actual figure is ~11% when those no longer looking for work are counted is a "statistical mirage." I would say that the Fed paying more than market value and knowing that at least some of the assets purchased will turn out to be worthless is a fiscal transfer in spite of any accounting mirage. It's not all that different from changing the accounting standards in order to conceal insolvency.

5:56 PM  
Blogger STF said...

Ramanan @2pm and JKH @431pm

Completely agree. :)

6:56 PM  
Blogger Tom Hickey said...

JKH: "That's the left leaning bias of pessimistic certitude that I referred to.'

Not just the left. Apparently you haven't been paying attention to Ron Paul and the Austrians/Libertarians on this. It's an issue on which Dennis Kucinich and Ron Paul agree.

I would say that it is beyond left and right, too. Occupy Wall Street and the 99% movement is based on Wall Street having been rescued and Main Street left hanging out to dry. Many people across the political spectrum see the Fed as the arch villain behind this, rightly or wrongly. While there is a lot of conspiracy theory involved, knowledgeable people like MIchael Hudson (advisor to Kucinich) and Bill Black suggest that it is not entirely conspiracy theory.

I think that the issue boils down to liquidity v. solvency. The Fed is empowered to provide liquidity to solvent banks, not rescue banks from insolvency. A lot of people are convinced that the Fed rescued the TBTF banks from insolvency under the guise of providing liquidity. That can only be done through providing fiscal transfers in one way or another, and regulatory forbearance while it is being done.

Let's take an obviously monetary operation of the Fed lending to the banks on the pretext of increasing liquidity so they will lend it on to businesses (presuming the money multiplier). Instead of lending on, the banks borrow at near zero from the Fed, buy Tsys, and pocket the differential. This is the current perception, again rightly or wrongly. Is this actually a transfer to the banks? Is is being perceived as such, both on the left (Kucinich, Sanders) and right (Ron Paul).

There are grey areas here and considerable confusion about not only what happened but interpreting it. There is a need to be more clear about monetary and fiscal in the matter of what appearances suggest was intentional transfers from public to private "behind the veil," if not actually payments made.

Unless MMT can clarify this satisfactorily, the day is going to go to Ron Paul and Dennis Kucinich (AMI). It's already headed strongly in that direction.

Why is this important. Most people interested in MMT other than the professionals could give less of a hoot about monetary economics. It's about policy. People want a clear explanation of what happened, why it happened, and how to fix it and prevent it from happening again.

What needs to be explained is that seemingly a gaggle of NFA ended up with the banks beyond fiscal appropriations by Congress and which the banks don't seem to have earned from doing business in the private sector. Did all that come from prop trading?

7:44 PM  
Blogger JKH said...

TH,

I paid enough attention to Ron Paul and his cohort in my previous 4:31 (to you),

“and/or "end the Fed" oriented”

2:03 AM  
Blogger Ramanan said...

I think when Tom started his comment at 8:21, it was a major digression from the topic.

Though, I still believe it is, JKH has brought an important point and there has been a good discussion after that. I agree with everything JKH has said.

The accounting terminologies created and used by national accountants have the least amount of bias in them.

Whatever debate one can have on the financial system rescue programs, it doesn't justify using the word "spending". For example, if the Fed didn't incur any losses (and it didn't), do we go first call it spending and later go back to rerecord them as not spending?

The national accountants have a precise way of doing it as JKH summarized.

The debate about whether the Fed did what it did is right or wrong is in entirely different matter altogether, Tom.

Using that for arguing what you did at 8:21AM in response to 9:48PM is not right, especially given that you changed the definition of NFA to begin with - as in you wanted Fed purchasing non-government securities to be called a change in private sector NFA to begin with. Actually, you claimed that it is.

I am not criticizing your point of view on whether the Fed should be allowed to do xyz, but it's a different debate.

2:47 AM  
Blogger Tom Hickey said...

Ramanan & JKH

I think it is central for this reason. One of the issues that under discussion not only here but in other places is MMT terminology. A problem arises when trying to state MMT in the professional lit and also trying to express the basic ideas in terms people can understand. I address this is a previous comment under a previous post herehere on this blog.

I am not concerned with what economists say to each other, since I am not a player in that game. But I am concerned with how MMT economists talk about MMT to non-professionals and how non-professional attempt to explain this in lay terms to others in the hoes of influencing understanding of what was involved in the global financial crisis, why no mainstream economists saw it coming and still cannot explain it, why it spread to the rest economy, and how all this can be fixed. MMT has answers to these crucial question. How those answers are stated to non-professionals makes a difference.

I appreciate where you guys are trying to get MMT economists to make themselves clearer to other economists like Lavoie and financial professionals like JKH. But let's not overlook the other side of the coin — communicating with non-professionals is a way that is both clear, precise, concise, and persuasive. This is probably going to mean cutting some corners with respect to technical precision in the jargon of academia and financial professionalism.

If this is not accomplished satisfactorily, MMT is going nowhere as a means of influencing policy. It will remain a quirky theory on the periphery of heterodox economics.

MMT economists and professional finance folks have to cooperate in developing a suitable presentation. Warrem made a brave attempt in 7DIF, and so have many MMT economists on the blogs. However, they are being sniped at for not being precise.

The people who think that MMT as policy solutions to offer that may yet "save the world" before the house of cards collapses need to work together in crafting a way of presenting this outside the coterie.

I am putting my hand up as an MMT proponent and need a clear, non-technical presentation that I can bring to my local OWS/99% group, for example. So far I have not been able to get past the objection that the Fed is a private corporation run by international bankers taking over the world for the 1%. And these are not Ron Paul folks either.

8:00 AM  
Blogger Neil Wilson said...

" So far I have not been able to get past the objection that the Fed is a private corporation run by international bankers taking over the world for the 1%"

That should give you the way in. Fire the board of the Fed and nationalise it - place it under the control of a congressional committee so that Fed decisions are made by elected individuals.

The line should be that those deciding the price of money should be elected the same way as those deciding how it will be spent.

10:08 AM  
Blogger Tom Hickey said...

Neil, many would like to see the Fed abolished outright or the Federal Reserve Act revisited. Certainly, I would. But the beauty of MMT is in showing how a great deal can be done by tweaking the existing system, which is doable with a lot less political pressure than abolishing the Fed or revising the entire legislation, which is what the Ron Paul and Dennis Kucinich (AMI) folks want to do. That is a much bigger step and much more politically impractical then what MMT proposes as a fix.

There is some difficulty getting this position across because many see an MMT solution as just a tweak to an existing system that doesn't do enough. It's a difficult sell to people who see the existing system as designed by international bankers intent on political and economy global hegemony and using central banks for this purpose.

This is already a widespread view and it is becoming a fad among the young. It's in now. MMT is bucking the trend here, so it is really important to get popular presentations out there that will affect that trend. So far there is virtually nothing, and certainly nothing hot enough to being going viral anytime soon. The only person anywhere close to MMT that has any street cred is Michael Hudson.

10:50 AM  
Blogger jim said...

To Tom Hickey:

You have raised many fascinating issues in your commentary here.

I would like to focus initially on your comments and those of JKH dealing with MMT, empiricism and Wittgenstein.

You state “I have written …from the point of view of analytic philosophy, the major purpose of a philosophical investigation is to clarify the logic, not the facts, which is a scientific matter. If there is a dispute after the verifiable facts have been adduced, then the dispute is over the logic--”logic” here being used in the wider sense characteristic of Wittgenstein, for example.”

You later state in a comment to JKH that “I read the Tractatus as an elucidation of the logic of description. LW is claiming that descriptive logic can only be used to describe a world other than itself, and it cannot serve to describe itself.”

Then JKH states, in what I take to be a somewhat satirical tone, “So the question is--do we or do we not have a “TractatusLogico--MMT.” I particularly like this part: “Whereof one cannot speak one must be silent.” Reminds me of consolidation.”

Wittgenstein, near the end of the Tractatus states “My propositions serve as elucidations in the following way: anyone who understands me eventually recognizes them as nonsensical, when he has used them--as steps--to climb up beyond them. (He must, so to speak, throw away the ladder after he has climbed up it.) He must transcend these propositions and then he will see the world aright. What we cannot speak about we must pass over in silence “ Tractatus (151).

In my opinion, the upshot of his analysis is that no statements whatsoever can be conclusively empirically verified, including even those set forth in his doctrine of logical atomism and the picture theory of the proposition. The reason Wittgenstein’s philosophical propositions are “nonsensical” is that they cannot be validated in their own terms. Consequently, we all end-up in the domain of silence--”What we cannot speak about we must pass over in silence.”

The failure of Wittgenstein’s empiricist project echoes the earlier failure of Hobbes and Hume. For all three, the data (both external and internal stimuli) that are received and processed by the senses have to be grouped and categorized thru the application of names and labels before they become usable.( a process you and JKH and Scott are engaged in your discussions, for example, of the words “operational and “consolidation” in MMT.

This process of naming suggests that there is always a margin of wagering or uncertainty hovering over the body of statements we take to be true. It also suggests the primacy of naming over the objects named, and because names are not securely certified by things, as you are discovering in your collective conversation, there are often multiple (and sometimes even contradictory ways for denominating things.

We seem to be left with the realization that even so-called facts constitute low-level theories--because naming appears to have ontological priority over that which it names.

What we tend to do as a consequence, in our areas of expertise, where there is really no purely descriptive reading of any situation or event because of the gap between words and things-- is to acknowledge that there is an ineradicably normative dimension in every descriptive formulation. Then our “descriptions” attain closure through our normalizing of one particular reading.

But to this point MMT theorists seem to have refused to acknowledge the normative dimension to their theorizing primarily because it appears they still believe in an already failed empiricist project.

1:40 PM  
Blogger JKH said...

“We seem to be left with the realization that even so-called facts constitute low-level theories--because naming appears to have ontological priority over that which it names... What we tend to do as a consequence, in our areas of expertise, where there is really no purely descriptive reading of any situation or event because of the gap between words and things-- is to acknowledge that there is an ineradicably normative dimension in every descriptive formulation. Then our “descriptions” attain closure through our normalizing of one particular reading.”

I think I can come close enough to understanding this.

Among other things discussed this week, I would apply this idea to one's optimal definition and meaning of currency issuer, as well as one's optimal definition and meaning of base case. These are choices.

I view these words and their meanings as launch pads from what exists to what is possible.

2:22 PM  
Blogger Tom Hickey said...

Wittgenstein is extraordinarily difficult to interpret for several reasons. on one hand, there are different ways of reading him. On the other hand, if if one actually thinks he understand LW, it is difficult to state this clearly be because one gets tied up in the limits of language that LW was attempting to elucidate.

In my reading it was a mistake to read the Tractatus as an empiricist work. LS said as much in rejecting its use by the Vienna Circle. In my view the mistake that LW admitted but never definitively explained was in taking the articulation of the logic of description in the TLP as the base case of logic. It was an overextension, as his Cambridge colleague and friend, economist Piero Sraffa elucidate for him with a simple gesture. LW came to see that describing is only one thing that language does and that it, while extremely important, is not the base case at all. There are many ways that language functions to communicate and the underlying logic is not only that elucidated in the TLP.

What I am saying about MMT is that there are two major uses of MMT analysis. The first and underlying one is economic theory and the second that proceeds from it has to do with policy implications. The first really only concerns professionals and it should be conducted in the professional literature and at professional meetings. The second is far broader in scope and the communication has to be suitable for non-economists right down to the most logically "primitive" levels of communication like music. This involves different uses of language having different logical structures. It is like comparing fishing nets. The mesh is determined the size of the fish to be caught without snaring too much and creating drag.

We need to be thinking in terms of what needs to be accomplished and how to do it. I think that it is great that Marc Lavoie sees MMT as important enough to spend time writing about things he would like to see improved upon. But that is primarily between him and the MMT economists, as well as for the consumption of other professionals. At the same time, this all has to be stepped down for popular consumption wrt policy. MMT economist not only have to answer Marc, they have to make what they say available to others in a way that convinces people that the objections have been met satisfactorily.

Part of this is explaining questions and objections raised wrt MMT by economists and meeting them in terms ordinary folks can grasp. Otherwise, the retort will be, "Oh, Bob Murphy, Scott Summer, Eladio Febrero, Marc Lavoie, fill in the blank, showed MMT to be a crock and the MMt'ers crackpots."

For example, this something that mmtwiki.org is supposed to be doing. But it is something everyone that thinks MMT has something to offer wrt policy needs to consider.

In a sense, Wittgenstein failed in his attempt to reform the discipline of philosophy as evidenced by the controversy that surrounds what he was advancing and the lack of application of his style of thinking. He remains something of a curious anomaly in the history of thought. It would be a shame if MMT mets the same fate because it never get applied. We have to make sure that doesn't happen by communicating better.

3:31 PM  
Blogger jim said...

JKH

You hit upon an important dimension of the argument. There has to be a prior choice or decision in order to have a problem in the first place--and not just to devise a solution for it.

Your optimal definition and meaning of currency issuer, as well as your optimal definition and meaning of base case involve choices on your part and you “…view these words and their meanings as launch pads” from what exists (in your conceptualization) to what is possible.

Your descriptions are posits concerning the future shape of reality.

The fact that there is a choice involved in order to situate your problem to begin with suggests that the language of problem identification is metaphorical--that such choices do not reflect situations that exist completely independent of your chosen conceptual formulation. Thus how we linguistically frame a slice of experience is never totally determined by the experience itself.

These ideas, which come from the formulations of political theorist, Aryeh Botwinick, I find extremely persuasive.


Tom

I agree with you that the Tractatus is finally not an empiricist work but, in fact, is a work that documents the impossibility of purely descriptive statements.

But if many MMT economists ( and advocates such as yourself) accept the validity of purely descriptive statements when discussing the operations of our monetary system then this should be highlighted, since some of you may be trying to give your preference for a system of particular values(i.e. a strong state) an air of objectivity which it does not really have.

Ironically, many Austrian theorists, for example, a person like Hayek, conceals his choice of a strong market order and a basically non-existent state behind evolutionary considerations which confers upon his theory an air of objectivity that it also does not really have.

The philosopher Stuart Hampshire once stated:

“In moral and political philosophy one is looking for adequate premises from which to infer conclusions already and independently accepted because of one’s feelings and sympathies. It is difficult to acknowledge the bare contingency of personal feeling as the final stopping-point when one is arguing with oneself, or with others, about the ultimate requirements of social justice. But I am now fairly sure that this is the true stopping point.”

I am persuaded that all of us engage in such circular reasoning--our reasoning takes us where our passions want to go.

8:12 PM  
Blogger JKH said...

Tom / Jim,

One of the problems with the existence of multiple different interpretations for one subject is that it’s quite difficult to focus on any particular one of them that’s different from one’s own way of looking at it, when you know there are even more of them swimming around in the sea. The mere presence of these competing creatures can be distracting...

I think it would be good if some taxonomy of these views were to develop gradually over time. And while it should be possible to develop an effective version for main street consumption, I’m not sure the full suite of alternative interpretations would turn out to be so simple. And there may not be anything wrong with that. In fact it may be the right way to go. Understanding the complexity of the thing in its entirety may help to create the most effective version for main street consumption. Now if that version is already deemed to be the 7, so be it. But that’s a declaration of mission accomplished that MMT has to be satisfied with. Or is the 7 both an arrival and departure point on the journey? Over at the Wittgenstein branch office of MMT, Tom Hickey seems to have his doubts that he has exactly what needs for his purpose. (Sorry Tom, just can’t resist some fun with that meme.) ...

I found it quite interesting that Lavoie correctly describes the same superstructure for MMT that STF documents as an MMT’er – two components, reflecting monetary operations and policy. MMT tends to emphasize its belief that the monetary operations component is ideologically neutral. In sympathy with that belief, I’ve heard Mosler a few times express the connection between the two components along the lines that the monetary operations component opens up possibilities for the policy sphere, and that there is no preconceived ideology that is implied in such policy sphere choices. At the same, I think it’s reasonable to say that the actual ideological orientation of the MMT leadership group is “left leaning”. Now it may be the case that I’m not being perfectly accurate or correct in using a sweeping “left” description here, but I think the drift is fairly reflective of such a policy orientation for the most part.

Given the largely “left wing” lean of MMT blogs that have grown in number over time, I’d say there’s a risk that a dual barrel MMT may have become too big to be manageable. Beneath the surface, this may have something to do with the stuff of the communication challenge, as well as the criticisms of Lavoie, although the effect if it exists is probably subliminal more than overt. I’m not sure my own analysis of form per se has that much to do directly with ideological influence, but I suppose it’s possible in an indirect way.

For Tom’s purpose, I see advantages in general humanistic terms to understanding how the monetary system works – understanding one component in order to market the second. But I’m not sure that this is an important requirement for his key message. Is an assumption about the neutrality of a description of monetary operations actually required for the purpose of marketing a left leaning policy? Why would monetary description neutrality even be interesting for that purpose? What is the benefit, given the tilt of the policy message?

I have to admit that when I analyze anything in MMT, I really don’t think much about the issue of differentiating the economics profession from the rest of world. I think about describing something in terms that are hopefully as accurate and unambiguous as possible. But that purpose should apply to economists and non economists. That said, the category of interested economists or non economists can’t overlap heavily with Tom’s target audience. Most O movement people are not burning the midnight oil studying monetary operations.

So I think the suite of audiences is potentially complicated.

(shortened slightly from elsewhere - to fit here - for Tom's reference)

4:25 AM  
Blogger Tom Hickey said...

My reading of Wittgensteins's articulation of the logic of description in the TLP is that a "fact" is what corresponds in the world to a true proposition in language. The grammatical construction of the proposition presents "logical picture" of a putative state of affairs as a possibility, in which the grammatical structure of the proposition corresponds isomorphically with the physical structure of the fact. That isomorphism is a logical structure that cannot itself be described because it is a precondition of description.

In framing propositions that represent possible states of affairs that are assert or denied as factual, it is the logical framework that determines the "fact." It is totality of possible proposition that dissects the world into the total of putative facts. Propositions are are true if and only if facts correspond to them. All others are false. Those that cannot be determined are indeterminate.

LW extended this conception in the PI to how all communication fits into an overarching logical framework that he called a worldview (Weltblick). One's worldview determines one's world, and a worldview is logical rather than factual. Entire worldviews can be fundamentally "wrong," as we know from history, especially since the advent of science.

The structure of the framework is normative rather than factual, which is shown by the fact that apparently descriptive proposition are privileged from error. They are statements of value more than fact, even though they may happen to be factually true. This is because they serve chiefly as criteria for judging the truth and falsity of other propositions, and as such are placed beyond questioning. Even scientists have a very difficult time being open to the possibility of fundamental criteria possibly being mistaken, even though science is admittedly a tentative enterprise subject to revision based on feedback.

There is no overarching worldview because there are no absolute criteria in a relative universe. Even logic itself is not absolute, as Gödel's incompleteness theorems suggest. Worldviews are necessarily logical rather than factual, since they determine the approach to structuring propositions and assessing their truth value based on logical criteria as well as empirical.

Subsequent cognitive research is bearing this out. Institutional economist David C. North relates this to economics in "Economics and Cognitive Science."

The upshot of this is that agreement is the basis of meaning and truth. Of course, this is not conscious agreement in the case of worldview, since no one is fully aware of the complexity of one's worldview. Wittgenstein used the term "form of life" to indicate shared agreement. While humanity share in a biological form of life that make translation from one language to another possible, there are logical "forms of life," too. Only those equipped with a sufficiently developed mathematical ability can communicate with each other about advanced physics. Within this group, there are competing interpretation of QM.

We often hear that perception, suggesting something physical, is reality. Actually, it should be conception — something logical — is reality.
(continued below)

11:34 AM  
Blogger Tom Hickey said...

(continued from above)

As LW said in the TLP, "The world is my world." We are all Leibnitzian monads, so to speak, whose conception, made up of a complex interaction of cognition, volition, and affect determines our respective worldviews. Logical agreement permits communication among us, and often we presume that "the world" is something that we all share. "Reality" is the outcome of how people communicate with each other and what they agree over.

Human beings agree in general only over the trivial things. We tend to associate in groups based on agreement regarding basic criteria, but in every group there are divisions and outliers due to disagreements over criteria and framing. But one the big issues, there is widespread disagreement not only over putative fact but over criteria.

So what I am talking about is approaching framing on this basis. The quest for the holy grail of economics as a complete explanation based on definitive description is a fruitless search. even physicists can't agree completely on theory, and all theory is tentative anyway, dependent on future discovery.

MMT economists meed to communicate with their profession effectively in the language of the profession. At the same time, MMT needs to be expressed for effective communication with non-economists if it is going to become effective as a policy tool. This requires careful framing that combines the positive and normative.

11:34 AM  
Blogger Tom Hickey said...

Ooops. Apologies to Prof. North. His first name is Douglass, not David. I don't know where that slip came from. Should have caught it in the preview.

1:13 PM  
Blogger jim said...

Tom:

I agree with much of what you just stated above, especially “the quest for the holy grail of economics as a complete explanation based on a definitive description is a fruitless search…”

The self-acknowledged failure of Wittgenstein’s empiricist project evokes the earlier failure of Hume and Hobbes in the same endeavor. They both used a recourse to nominalism( external and internal stimuli after being received and processed by the senses have to be grouped and categorized through the application of names and labels) to further corrode empiricism.

This nominalism also erodes Wittgenstein’s empiricist project (which I’m not going to get into).

What seems more important to this discussion is how the failure of empiricism dramatizes the limitations of reason and by implication the limitations of professionals and technocratic experts in any field.

Instead of the passions being subordinated to reason it may be the case that reason is subordinate to the passions. Reason is an active set of capacities not evenly distributed among human beings and consequently divides us from one another. Yet the passions, refer to a common set of vulnerabilities among human beings which potentially unite us (in our common capacity to experience joy or suffering)--a much more enduring claim to equality.

I believe if the MMT’ers are to be a serious force for political change(and not be vulnerable to the charge of giving aide and comfort to corruption in the public sphere), you must begin to rethink your respective inherited conceptions of the state along with the rest of the liberal/left community.

You need a theory of the state as well as a theory of monetary operations--and perhaps a theory of the state which preempts it from articulating the human good.

6:15 PM  

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