A thorough defense of Modern Monetary Theory

boing
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Just glancing at the forbes list of most wealthy people, the top seems dominated by people who started and own a substantial portion of a highly successful company, like Bill Gates or Jeff Bezos. The only one on the top 10 that could even plausibly have anything to do with derivatives or similar financial instruments is Warren Buffet, who is famously opposed to them (or at least CDOs and CDSs, if i remember correctly). Now thats just the top 10, but if there are indivuals heavily invested in them, id love to know who they are.

Remember, derivatives are notionally huge, but the overall profits reported from them is pretty modest (wikipedia reports “2008 Second Quarter, banks reported trading revenues of $1.6 billion”) FWIW.

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Emphasis mine. Past tense is important.

But he’s not opposed to holding positions in investment banks like Goldman Sachs or JP Morgan Chase, etc., all of which generate and trade those investments.

Which is kinda the point we’re making. That money is parked, as much as if it was buried in the back yard or stuffed in a mattress.

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If by that you mean they are reaping the benefit of starting a company without currently adding much, then, sure, but whats your point? The point im trying to make here is that the top guys, or at least the top 10 isnt dominated by people dealing in exotic derivatives, its dominated by guys who own an income producing asset, namely stock in a company.

Sure Buffet is not opposed to owning stock in banks, but, again, so what? Berkshire Hathaway owns lots of stuff most of which has nothing to do with derivatives. Again, what you have is a rich guy who is rich via owning a lot of income producing assets, not by way of some derivative wizardry.

Im certainly not going to claim i fully understand the derivatives market, but i dont think it works that way. Its not as if there is 500Trillion dollars worth of assets that cant be used because its in a derivative market.

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It’s hard to tell if you aren’t listening, don’t understand, or are being willfully obtuse.

I don’t accept the point that we should only be looking at the top 10, but even with that very small list, it doesn’t matter how they made their fortune, it matters where that fortune is parked, how it is making income, and how that income is taxed.

Bezos is probably the exception in that, almost all of his wealth is parked in Amazon stock. Others on that list have diversified by now, and a big chunk of that diversification is being managed by financial advisers and is, on one level or another, invested in the derivatives market.

Outside of the top 10, what we’re really getting at is the old, generational wealth that gets tucked away nicely in low-risk, high-ish yield instruments that are really only available directly to large investors. One layer removed from that are the investment banks themselves. Owning GS stock is investment in the derivatives market, as they are the originators of so much of it, often generating instruments that will ultimately end up toxic, but which have passed out of their hands long before the stench is detectable.

I am also not a SME on the derivatives market, but what is clear is that it is the equivalent of investment trading cards. No one in that market is trading things of value, they are trading markers based on changes in value of things that have value. On top of that, there are derivatives of derivatives, and derivatives of derivatives of derivatives. Point being, all that money isn’t active in the economy. It’s not being used to buy things, pay people (other than bankers, maybe), build things, or create stuff. It is sequestered from the economy. As a result, taxing it like an investment in a business/company is harmful to the economy. It’s parked, earning income without participating in the economy, unlike the wage paid to a worker who spends it all paycheck-to-paycheck on food, shelter, transportation, etc.

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This is true. Derivatives trading is speculation and not investment. Mind you trading bonds on leverage is speculation and not investment. It is argued that speculation is necessary to ensure sufficient liquidity to keep risk premia on underlying investment assets low.

A reasonable person might giggle a bit when they see this argument. It amounts to saying that the 95% of speculation you see should be privileged because it facilitates the 5% of actually economic activity you see. Still, reasonable folk can agree to disagree.

Personally I think arguments which use neoclassical economics and reference “fairness” are always fundamentally flawed. Neoclassical economics is not built on “fairness”, but on some weird notion of “efficiency” - Pareto efficiency. For neoclassical economics to generate a fair outcome one might have to accept that wages match marginal revenue products, a theory of rents would be necessary, and you would need to address the question of “initial conditions” (see Wicksell).

Still, all good fun eh?

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Yea, i dont think any of this is correct, but perhaps its best to just leave it at that.

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Every country of which I am aware that has managed to establish and maintain a robust social safety net has paid for it via a broad based system of taxation. None has used “modern monetary theory”.

I’d prefer to stick with something that’s been proven to work, if you don’t mind.

MMT has a dangerous air of “there are no tradeoffs required” about it. That way lies madness. There are always tradeoffs.

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I used to say to our audiences: “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”

– Upton Sinclair

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Inflation?

Yes. Actually a lot of fairly prominent economists, including DeLong, Krugman, and Summers do. The 2% ceiling [1] was somewhat arbitrarily set with the assumption that actual inflation would never be much lower and that the Fed could bring it back up whenever, while rampaging inflation would be hard and damaging to deal with.

Then 2008 happened.

The thinking now is that 4% would be a much better target since from experience the Fed can do a better job of tapping the brakes than the accelerator once the zero lower bound gets close and that once the economy gets into negative country it’s hard to bring it out (unstated: especially in the face of Congressional opposition to actually, like, actual projects to put people to work. Tax cuts don’t count.)

[1] it’s supposed to be symmetrical, but the Fed always freaks out as 2% approaches no matter what – functionally it’s a ceiling).

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