It's On: Time for a Market Monetarist-MMT Smackdown

     Of course as Cullen Roche already has a schism with MMT-his new school is Monetary Realism-who can keep up? Still I do think that comparing and contrasting these two systems that have made a big enough name for themselves on the Internet that the Economist wrote a featured story about them would be fruitful, a real learning opportunity.

     While I have given Sumner a hard time lately-he to my mind deserves it as he keeps being so snarky about the Keynesians and "fiscalists"-his blog has a huge following and I think it's deserved even though I question some of his commitments.

     Sumner did try a few times last year to have a meeting of minds of a sort between the MMTers and his Market Monetarists.

     One try was a post he wrote about the Quantity Theory of Money (QTM). The point of this post was that there is no way to think about the price level without the QTM. This lead to some quite lively debates in the comments section.

     http://www.themoneyillusion.com/?p=10116

      "This is sort of a response to some Keynesian/fiscal theory/Post Keynesian/MMT theories I’ve seen floating around on the Internet.  Theories that deny open market purchases are inflationary, because you are just exchanging one form of government debt for another."

       So we see that Scott is already biting off quite a lot, trying to paint with a pretty wide brush. He wants to knock them all off with one punch.
       His approach for knocking all these theories out is already indicated in the title "Are there any non-QTM explanations of the price level?" Sorry to give the punchline but his answer is no.

       "Here’s my problem with all non-QTM models.  Suppose I’m right that only the QTM can explain the current price level.  Then it stands to reason that only the QTM can explain the price level in 2021.  Then it stands to reason that only the QTM can explain the inflation rate between 2011 and 2021.  Now it is true that a change in the money supply will have certain effects on nominal interest rates, economic slack, etc, depending on whether the monetary injections were expected or not.  And you can try to model the inflation rate using those changes in interest rates, economic slack, inflation expectations, etc.  But that’s really a roundabout way of getting at the problem.  If the QTM says that the price level in 2012 will be 47% higher due to changes in the monetary base, plus changes in the public’s desire to hold currency as a ratio or NGDP, then either the non-QTM approaches also give you the 47% answer, or they are wrong."

     So notice that Sumner has made some significant leaps and assumptions. His entire approach in showing up these various fiscalist, Keynesian and MMT theories is predicated on the idea that they are all non-QTM models.

     In the comments section as always when he has written about MMT he was inundated with comments. One MMTer who went toe to toe with all comers including Market Monetarist extraordinaire Lars Christensen-Lars created the phrase Market Monetarist-was Mark S.

    Lars declares, "Scott, It is simply unbelievable that so many economists do not accept QTM as it is not only logically the only valid price level and inflation theory, but probably also the best empirically documented economic relationship in global history."

    "To not accept QTM is like not accepting the law of supply and demand. If more money is printed then the value of money of course drops. As the value of money is the inverse of the general price level – prices will go up when the money supply growth faster than money demand. How could anybody believe otherwise???"

    "Keynesian economic – New and Old – has led to a serious misunderstanding of money and prices and there is a need to restate some facts:

      1) Interest rates are not the price of money, but of loanable funds
      2) GDP growth and lower unemployment does not lead to inflation
     3) Rising oil prices is an increase in a relative price and not in the general price level
     4) Inflation is always and everywhere a monetary phenomenon…
     5) And if you fear deflation then just appoint Gideon Gono of ECB chief or Fed governor…

     Mark S fires back "Lots wrong here as usual. The QTM assumes that an increase in bank reserves will lead to increased lending and an increase in the money supply. But I’ve already taught you that banks never ever lend their reserves. That is simply not how modern banking works. Now, I know you’ve admitted that you don’t understand banking very well, but you need to stop making this assumption that more reserves = more money in the economy. It’s simply not true. "

     "How do I know this? I work at a friggin bank. I know exactly how and why we loan money. And it has nothing to do with how many reserves the Fed fires into the economy. It has only to do with our capital position."

     "MarkS, What if you put 1 trillion dollars on Time Square every day won’t you get inflation? And if not, why not just put 100 trillion there every hour…And why do you obsess about the banking sector? There is no reason to assume that the injection of money into the economy happens through the banking sector…"

   " And if QTM is wrong, then what is your inflation theory? Magic??"

     Mark replies to Lars,

     "Lars, You clearly don’t understand modern banking either. The Fed does not have the power to “put 1 trillion dollars on Time Square”. The Fed only has the power to alter reserve balances WITHIN the banking system. Now, people like Scott falsely assume that more reserves = more lending = more money, but it’s totally dead wrong. Banks don’t lend their reserves. That’s just not how it works."

     "So, the only way for the Federal government to “put 1 trillion dollars on Time Square” would be through deficit spending. Would that be inflationary. Hell yes it would."

 
     "Scott’s whole framework is wrong because he doesn’t understand modern banking (something he has admitted to on this very site).

    Scott Fullwiler thoroughly crushes you here:

http://neweconomicperspectives.blogspot.com/2011/07/scott-sumner-agree-that-mmt-policy.html

    Now whether or not Fullwiler crushes Sumner here is another question. What is clear though is that Fullwiler declares that, "Finally, just as an aside,Sumner concludes with, “So here’s my question: Are there any non-quantity theoretic models of the price level?” Of course, the price level itself can be anything depending on which year uses as a base year and the value at which the base year is set, so what’s really of interest is understanding changes in the price level instead of the level itself. Interestingly, MMT is also a quantity-theoretic model of changes in the price level. The differences are (1) net financial assets of the non-government sector, rather than traditional monetary aggregates, are the MMT’ers preferred measure of “money,” and (2) desired leveraging of the non-government sector is akin to what one might call “velocity.” In MMT, the two of those together (net financial assets of the non-government sector relative to leveraging of existing income) set aggregate demand and ultimately changes in the price level, at least the changes that are demand-driven."

    In other words, according to Fullwiler, MMT actually is itself a quantity-theoretic model. So Sumner spends a whole post insisting that there's no way to understand the price level without the QTM which is supposed to prove that this is the Achilles Heel of MMT, and it turns out that MMT actually does believe in the QTM.