I’ve been trying to make sense of the macro landscape since, well, that’s just what I do. One of the frameworks I’ve been trying to learn more about is Modern Monetary Theory, but I have to admit it has been a bit of a mind-bending experience and I’ve not always had the greatest success getting my head around it.
Having said that, when I read about Paul McCulley of PIMCO doing MMT, I wanted to see what I could find out. So I wrote up a question for Edward Harrison at Credit Writedowns, who I have a great deal of respect for:
Interesting stuff. Edward, I have two questions for you:
1) I agree with you about this being a secular change in aggregate demand instead of a cyclical change. So in your mind, will the MMT approach work? Maybe you said it already, but perhaps you could re-state.
2) China taking on the consumer of last resort makes sense given their surpluses. Do you think the news regarding the Dagong’s rating of the US vis-a-vis China is about getting cheaper costs of funds to take this role on or is about capital inflows because credit and real estate are facing headwinds there now?
Thanks as always.
Here’s Edward’s response:
Yes, MMT works. But, remember MMT is just a framework -a lens – through which to view actual economic events. It is a very useful framework though because it forces one to look at all individual transactions or any aggregate shift as having two parties with balance sheet effects.
If I reduce my purchases from you that has implications not just for me but for you too. A lot of politicians try to talk about the budget deficit in a unitary way without working through the numbers.
This still doesn’t get away from the longer term problems regarding the (mis)allocation of real resources (monetary and physical). But it doesn’t allow people to cheat intellectually and act like austerity will be positive for the economy.
I was actually in bed when I saw this via my friend Scott and got up just to write a quick blurb on it. So I am headed back there now! More in the morning.
Looking forward to what he has to say on this…