Category: Economics

Me, in October… Does raging inflation prove or disprove Modern Monetary Theory?

… is it fair to say that MMT is actually the mainstream economic philosophy in the U.S. and has been since at least March 2020? (In other words, the folks who run the U.S. economy profess belief in neoclassical economics, but their actions reveal a belief in MMT.)

November 21, 2021 WSJ… “Modern Monetary Theory Isn’t the Future. It’s Here Now.”

The infrastructure act signed into law last week marked a defeat for the faction of progressive economists in ascendancy in 2020. For these advocates of modern monetary theory, the insistence by both political parties that all the $550 billion of new spending be matched by offsetting revenue, known as “payfors,” goes against their belief that money is merely a tool for government.

This is a temporary rhetorical setback. The reality is that MMT’s ideas have insinuated themselves deep into government, central banking and even Wall Street—and the infrastructure act is in fact deficit-financed anyway.

MMTers detest payfors as wrongheaded thinking about money. Money only exists because of government spending, and under MMT, the government should just create as much as it needs to finance its projects. In a tight economy—like we have now—MMT might want offsets to new spending. But higher taxes or lower spending elsewhere would be aimed at avoiding inflation, not at balancing the budget.

The government hasn’t embraced MMT. But important elements of it are now accepted by much of the economic and financial establishment, with major implications for how the economy is run.

“Governments have lost their fear of debt,” says Karen Ward, chief market strategist for EMEA at JPMorgan Chase’s asset-management arm. “They were terribly worried about bond markets and investors punishing them. What they saw last year was record high levels of debt at record low levels of interest rates.”

Central banks that had struggled for a decade to boost inflation using monetary tools found that fiscal tools were far more powerful. Government spending does far more for inflation than quantitative easing, it turns out, and central-bank calls for more fiscal action to boost the economy are more likely to be accepted next time deflation looms.

In the next downturn it is going to be very difficult for governments to resist calls to provide huge support, now that it has been shown that bond markets don’t care. That should mean recessions are shallower, debt is higher, the government is more involved in the economy and, assuming the Fed doesn’t accept that its tools are useless, interest rates are higher on average than in the past. Bond markets aren’t pricing in anything of the sort, though. The 30-year Treasury yield is only 2%, well below the 3.2% average of the 10 years up to 2020.

MMTers mostly aren’t worried about President Biden’s spending plans causing inflation anyway. But MMT prescribes that if tax rises are needed to slow demand, billionaires wouldn’t be the target: The rest of us would.

This guy predicts a future of higher interest rates and higher tax rates for the upper-middle class! (on the other hand, how can the bond markets be so wrong?)

Note that MMT doesn’t have to be correct for the WSJ article to be right and/or relevant. MMT just has to be the prevailing belief among those who direct the U.S. economy (roughly 50 percent of which is now direct government spending or government-controlled (health care, arguably banking)).

Speaking of inflation, some Bitcoin enthusiasts with whom I spoke at a Miami Beach party recently estimated that the inflation rate as perceived by a middle class American is 10-14 percent and closer to 22 percent for a high-income or wealthy individual. The house is on a side street, which became littered with exotic cars (you could be parked in by a Ferrari and a Mercedes G-Wagon), many of which had California plates and/or dealer insignia from California. One California refugee had recently moved into a condo that is part of high end hotel. A Web search revealed a price range of $7-50 million for the various condos, but it is unclear if those were pre-Biden prices or current. “Did you sell some of your Bitcoin to buy the condo?” I asked. “No,” he replied. “I sold a bunch of Sh*tcoin.”

The crypto enthusiasts disagreed about various technical topics (trust in financial transactions is problematic if you can’t be 100 percent confident that certificate authorities won’t be hacked into or grabbed by a central government), but one thing that they all agreed on was that it was insanity to hold dollars. “You’ve lost at least 20 percent on any cash dollars that you held this year,” one pointed out. (See above for the 22 percent inflation estimate. Consistent with this estimate, the S&P 500 is up roughly 23 percent over the past 12 months.) I don’t think they’d be any happier to hold a U.S. Treasury bond, even one that is pegged to the official CPI.

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We’re told that house prices across the U.S. are up by 20 percent compared to a year ago (see Inflation would be 10 percent per year if house prices were included). Yet in our neighborhood here in the Florida Free State, both prices and rents are up closer to 50 percent. A community built for middle class (town houses) and upper middle class (single-family homes) now has single-family homes listed for more than $2 million (would have been $1 million two years ago).

Vast areas of the U.S. are blighted and undesirable, yet one could still buy a house in those areas and those house prices presumably feed into the statistics. What if we looked at areas that have at least some of the following characteristics:

• good public schools
• convenient to jobs
• walkable
• low crime
• convenient to services for the middle class and above

Would the inflation rate still be only 20 percent?

Separately, maybe nominal prices don’t matter if one is sufficiently clever. “Long Island man dodges eviction for 20 years, living in house he doesn’t own” (New York Post):

A Long Island man who only ever made one mortgage payment has deftly used the courts to stay in the house for 23 years — for free, according to legal papers.

Guramrit Hanspal, 52, has filed four lawsuits and claimed bankruptcy seven times to avoid being booted from the 2,081-square-foot East Meadow home he “bought” for $290,000 in 1998.

So far, it’s worked: Two different banks and a real estate company have owned the three-bedroom, 2.5-bath home since Hanspal was foreclosed upon in 2000. But Hanspal remains.

Hanspal’s not the only occupant of the home leveraging the US Bankruptcy Code’s “automatic stay” rules, which give debtors a temporary reprieve from all collection efforts, harassment and foreclosures.

At least three other people listing the home at 2468 Kenmore St. as their address have also filed for bankruptcy in Brooklyn federal court, winning the “automatic stay,” only to have the claims eventually dismissed, court records show.

And a good deal: Hanspal, who had an initial 7.375 percent interest rate on the $232,000 adjustable-rate mortgage, likely saved himself upwards of $440,000 by not paying his bills.

Meanwhile, in 2004, Hanspal transferred the deed of the home to a friend, Rajender Pal, even though he had no legal right to do so, according to court papers. Pal, using the Kenmore Street address, filed for bankruptcy in 2005, staving off eviction yet again.

By May 2018, Chase unloaded the property to Diamond Ridge, which offered Hanspal $20,000 to leave. He didn’t take the deal, and instead, filed for bankruptcy again in 2019 and 2020. Another purported occupant of the house, Boss Chawla, filed bankruptcy four times in 2019, as did another resident — allegedly named John Smith — who filed once.

“The history of this case going on for approximately 20 years must come to an end,” Nassau District Judge Scott Fairgrieve wrote in a December 2019 housing court proceeding.

The last one is my favorite! The judge says “it must end”, but Messrs. Hanspal, Pal, and Chawla are still there two years later.

Loosely related… the happening downtown neighborhood of Delray Beach, Florida (I stopped there for dinner after teaching a class that ends at 9:20 pm):

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Someone at Disney did not get the memo about the official inflation rate being 6 percent. Email received today:

A 14 percent increase is especially painful for those of us who do not have TVs. Why do they need the extra money if they’re moving to Florida and won’t be paying California’s 13.3 percent state income tax rate?

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Happy Halloween! It has felt like Halloween for the past 20 months or so, with ordinary Americans dressing up as surgeons or asbestos remediators in masks.

I’ve recently had occasion to take some prison galley-style JetBlue flights, in which flight attendants walk up and down the aisle looking for people who aren’t wearing masks correctly. The ticket counter at PBI has a high clear plastic barrier that makes communication between agent and customer almost impossible (while simultaneously providing no protection against COVID, according to the New York Times). The workers behind the plastic, have been stuck wearing masks for 8 hours per day for all 20 months of “14 days to flatten the curve.” I asked a 13-year veteran of the ticket counter how many of her colleagues had quit. “Everyone who could retire has done so,” she responded. She was sick of wearing a mask, found it frustrating to try to make herself understood, and did not think the mask was effective at preventing COVID infection. Like most other customer service businesses, the airport is extremely short staffed and, despite a reduced passenger volume, lines can get long (except at TSA, which seems to have infinite capacity!).

There has been a lot of media coverage regarding how few Americans are working. And, indeed, the stats do show that Americans are passionate about relaxing at home:

What I find confusing, however, is that so many Americans are working at these masks-all-day jobs (though I am grateful for their service!). It can’t be because the masks don’t bother them, since the people I’ve talked to say that they do find the masks uncomfortable. It can’t be because there aren’t any no-mask-required jobs available because, at least here in Florida, there are plenty. It shouldn’t be because it is too hard to transition to disability, because “Long COVID” is a recognized disability and the symptoms encompass almost any medical malady.

I’m not saying that labor force participation should be 0%. After all, there are plenty of high-paid masked jobs (surgeon) and plenty of medium-paid no-mask jobs (work from home, e.g.). But why isn’t labor force participation rate down closer to the Puerto Rican number (42 percent)? It can’t be fun to spend the whole day wearing a mask and asking in-a-rush airline passengers to repeat themselves.

Related:

• “4.3 million workers are missing. Where did they go?” (WSJ, 10/14; paywall-free version): More than a year and a half into the pandemic, the U.S. is still missing around 4.3 million workers. That’s how much bigger the labor force would be if the participation rate—the share of the population 16 or older either working or looking for work—returned to its February 2020 level of 63.3%. In September, it stood at 61.6%. … Of 52 economists surveyed by The Wall Street Journal, 22 predicted that participation would never return to its pre-pandemic level.

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Ever wonder what the inflation statistic would be if it included some of the big purchases that people actually make, e.g., houses? A Wall Street economist, Joe Carson, recently wrote a piece on the current inflation situation:

Including house prices in the official consumer inflation statistics would lift the reported figure to roughly 10% and rival the early 1980s. Still, excluding the non-market shelter index from the official price statistics shows consumer price inflation running as hot as it did during the oil price spike of 2008. Both represent the fastest increase since the early 1980s, illustrating the breadth and speed of the current inflation cycle.

Other measures of inflation have already exceeded the reported figures of the early 1980s. Core intermediate prices for materials and supplies, which are part of the monthly producer price report, have jumped over 20%, well above the high readings of the 1980s.

If official government inflation is 6 percent, is it reasonable to say that 4% more would be added if actual house prices were included? From the same piece:

The initial signs of a new inflation cycle appeared in the housing market. In 2020, during the pandemic, house price prices rose 10%, according to the Case-Shiller. That was more than three times faster than the gain of the prior year and the most rapid increase since 2013. Some have argued that high and rising prices are self-correcting as buyers balk at the high prices. Yet, after increasing 10%, house prices posted a 15% increase, and the latest data shows a record 19.5% increase in the past year.

19.5 percent in this one component does seem as though it could translate to 4 percent for prices overall.

House prices in our neighborhood are so high that one homeowner has subleased the backyard to a research facility:

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Related:

• “Owners’ Equivalent Rent and Price Stability” (PennMutual): In 1983, the Bureau of Labor Statistics (BLS) made a change to an integral component of inflation indexes. The adoption of owners’ equivalent rent (OER) to estimate shelter costs meant home purchases would no longer be considered a consumption expenditure but instead a capital asset or investment. OER is determined by a monthly survey of consumers who own a primary residence. The survey asks how much consumers would pay to rent instead of own their home. OER represents approximately 25% of the Consumer Price Index and 12% of personal consumption expenditures (PCE). … Why has OER exhibited such stability versus market-based measures of shelter costs? Economists have observed that owner-occupied rental estimates tend to be “sticky” relative to market-based rental costs. Homeowners tend to underestimate rent appreciation during expansionary periods and overestimate it during recessionary periods. … The idea that home purchase costs are not an expenditure but an investment is likely difficult to understand for first-time homebuyers confronted with unaffordable housing options.
• What if you want to live in your car (on “camping mode”) instead? Tesla prices were up about 10 percent in the past few months and went up another 5 percent today (Reuters)

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Modern Monetary Theory is sometimes cartoonishly summarized as “government can borrow and print unlimited money without negative consequences so long as it issues debt in its own (printable) currency.” Based on this cartoon, what the U.S. government has been doing for the first 20 months of 14 Days to Flatten the Curve is exactly the right approach.

The Wikipedia summary of MMT is more nuanced. A government that issues its own fiat money

1. Can pay for goods, services, and financial assets without a need to first collect money in the form of taxes or debt issuance in advance of such purchases;
2. Cannot be forced to default on debt denominated in its own currency;
3. Is limited in its money creation and purchases only by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment;
4. Recommends strengthening automatic stabilisers to control demand-pull inflation[10] rather than relying upon discretionary tax changes;
5. Bond issues are a monetary policy device, not a funding device.

(Note that the government’s stated inflation rate, alarming as it might seem, grossly understates costs to buy a house (real estate prices are not included) and also is not adjusted for delivery time (see Is inflation already at 15-30 percent if we hold delivery time constant?).)

One of the policy implications, according to Wikipedia:

Achieving full employment can be administered via a centrally-funded job guarantee, which acts as an automatic stabilizer. When private sector jobs are plentiful, the government spending on guaranteed jobs is lower, and vice-versa.

What we’ve seen over the 20 months of 14 days is sort of like “guaranteed jobs” in that people get a paycheck, but they don’t actually work (the paycheck is called “$600/week unemployment check,” resulting in higher-than-median wages for those who don’t work). On the other hand, the government has put most of its effort into making existing government jobs more lucrative. Government workers have gotten paid for not working (teachers who didn’t teach, librarians at home while libraries were closed, park employees at home while parks were closed) and more government workers, already earning salaries far above those in the private sector, won’t have to repay their student loans (funded by higher taxes paid by those who never enjoyed the opportunity to go to college). On balance, it seems reasonable to consider the higher-than-median-wage unemployment payments as the “centrally-funded job guarantee” that MMT proposes. And, in fact, as any employer trying to hire can attest, full employment was achieved (i.e., everyone who wanted a job had one).

Do you buy or sell stocks and real estate when the government is printing money?

MMT economists also say quantitative easing is unlikely to have the effects that its advocates hope for.[66] Under MMT, QE – the purchasing of government debt by central banks – is simply an asset swap, exchanging interest-bearing dollars for non-interest-bearing dollars. The net result of this procedure is not to inject new investment into the real economy, but instead to drive up asset prices, shifting money from government bonds into other assets such as equities, which enhances economic inequality. The Bank of England’s analysis of QE confirms that it has disproportionately benefited the wealthiest.

Let’s see if the MMT folks were right:

Check and check!

The primary inflation control mechanism in MMT, again according to Wikipedia:

Driven by fiscal policy; government increases taxes to remove money from private sector. A job guarantee also provides a non-accelerating inflation buffer employment ratio, which acts as an inflation control mechanism.

What are the Democrats who control Congress working on right now, as the headlines are filled with reports of raging inflation? Tax increases!

First, is it fair to say that MMT is actually the mainstream economic philosophy in the U.S. and has been since at least March 2020? (In other words, the folks who run the U.S. economy profess belief in neoclassical economics, but their actions reveal a belief in MMT.) Second, have the events that unfolded since then proven that MMT is correct?

Related:

• “Rising Rents Are Fueling Inflation, Posing Trouble for the Fed” (NYT): rest assured that inflation is temporary, except that you’ll pay 10 percent more for at least the full year of your one-year lease (“That’s a concern for the Fed, because housing prices tend to move slowly and once they go up, they tend to stay up for a while. Rent data also feed into what is called “owners’ equivalent rent” — which tries to put a price on how much owners would pay for housing if they hadn’t bought a home.”)
• “As Inflation Rises, Beware of the Money Illusion. It May Cost You a Lot.” (WSJ) (average people unable to comprehend that selling a house at a profit in nominal dollars is not a success when inflation has been higher than the profit)

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As part of our move to the Florida Free State, I had Everpresent scan a photo album that my mom made in 1966 (she didn’t use acid-free paper so there was no practical way to preserve it other than scanning).

Here’s the air-conditioned brand-new house that my parents purchased in Bowie, Maryland (my father was working as an economist for Census Bureau): $15,990 with $590 down and $112/month ongoing. (Deal was arranged in 1961, but the house was completed and they moved in 1962. It might have been the Cape Cod, actually, which was slightly cheaper.)

Zillow says that the median price of a single family home today in Bowie is about $500,000.

How does that compare to official inflation? $15,990 in June 1962 is worth about $145,000 today says the BLS. So a house is more than 3X as expensive in real dollars, despite the fact that the above (air-conditioned!) house was brand new. (Would $15,990 in today’s Bidie Bucks even pay for a central air-conditioning system (installed)?)

Related:

• “Accelerating Inflation Spreads Through the Economy” (WSJ, 10/13)

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From a barbecue joint in Boynton Beach, Florida: “due to the shortages of commodities within the market such as chicken wings, pork and also beef we must increase the prices from what the menu prices reflect until the market begins to normalize. … we hope to retain you as a customer as we navigate these unchartered waters.” [sic]

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I find it fascinating that the folks who run this restaurant imagine that their costs will come back down (“normalize”) at some point in the reasonably near future. For places that aren’t as optimistic about our economic future, should they all switch to big screen TVs for menu display? Prices will need to be adjusted every month or two at the current rate of inflation, right?

Related:

• Austin and Lockhart, Texas: 10 barbecue restaurants in 72 hours
• Smoke BBQ in Fort Lauderdale (the only place that I’ve found in Florida that is competitive with the better Texas restaurants)
• All will be well in the garden; There will be growth in the spring! (Dr. Fauci as Chance the Gardener)
• “Accelerating Inflation Spreads Through the Economy” (WSJ, 10/13)

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