I Make Mike Norman's Economics Blog Again and Sumner Declares an IRR Paying World Safe for the QTM

   
     I'm besides myself with joy-really. Judging by the commentators I still don't think many MMTers get it:

     The problem is Sumner's got nothing…

     "So if Wray is misunderstanding Sumners argument it doesn't matter…Sumner doesn't have one (that makes sense)…he's incoherent. Embarrassingly so."

     "The best description of monetarism I can come up with is they are chasing their tails, or caught in an endless loop of nothing.."
     http://mikenormaneconomics.blogspot.com/2013/11/mike-sax-wray-vs-sumner-on-interest.html

     What is missing in comments like this is any understanding that a lot of people think Sumner has it and that MMT has nothing. Sumner has been very successful in changing the terms of debate over 4 years. The trouble is that even if Sumner has nothing, many believe otherwise. He has given aide and comfort to some conservatives but also led centrists and liberals to the Right. 

     Perhaps commentators like Paul Meli should read Rorty-who Sumner also claims to be a big admirer of. For there's the truth and then there are 'social truths' or things society believes are true. Social beliefs are the name of the game if you want to improve things for the better. If many people think monetarism is the answer there's a problem that can't be ignored. 

     I got a kick out of this new post by Sumner-he declares that in an IRR paying world the QTM still holds. It really did remind me of the recent discussions of his post he wrote on MMT and my and Randy Wray's interventions. Consider what he said in his piece on MMT.

      "Suppose we pick a fairly “normal” year, when NGDP growth and nominal interest rates and unemployment are all around 5%.  It might be 2005, 1995, 1985, whatever.  The exact numbers aren’t important.  Now the Fed does an OMP and doubles the monetary base by purchasing T-securities.  They announce it’s permanent.  What happens?"

      "One MMT answer is that the Fed can’t do this.  It would cause interest rates to change, and they peg interest rates.  But the more thoughtful MMTers seem to be willing to let me do this thought experiment, as long as I acknowledge that interest rates would change and that it’s not consistent with actual central bank practices.  I’m fine with that. "

      "So let’s say they double the base and let rates go where ever they want.  I claim this action doubles NGDP and nearly doubles the price level.  MMTers seem to disagree, as I haven’t changed the amount of net financial assets (NFA) at all."

  

      "But here’s the Achilles heel of MMT.  Neither banks nor the public particularly wants to hold twice as much base money when interest rates are 5%, as that’s a high opportunity cost.  So they claim this action would drive nominal rates to zero, at which level people and/or banks would be willing to hold the extra base money.  Fair enough.  But then what?  You’ve got an economy far outside its Wicksellian equilibrium."

      http://diaryofarepublicanhater.blogspot.com/2013/11/sumner-on-achilles-heel-of-mmt.html

      http://diaryofarepublicanhater.blogspot.com/2013/11/randall-wray-speaks-of-sumner-on-mmts.html

     So we see the power of the MB year by doubling it in a year of economic growth when there'd be no reason for the Fed to increase it much less double it. 

     His argument for QTM is similar.

     "Assume the monetary base is 50% interest-bearing reserves and 50% non-interest-bearing cash.  We are in normal times, with no liquidity trap.  The government decides to embark on a Latin American-style monetary policy of 100%/year trend inflation.  Because they read that OMOs don’t matter when you have zero IOR, they’ve decided to do so through changes in IOR, leaving the monetary base unchanged.  So they lower IOR, which reduces the demand for reserves.  Within a year or two the monetary base is almost 100% currency, which earns no interest.  I.e. America circa 2007.  And then they are stuck.  They have no mechanism for causing prices to rise 100% per year, for year after year, if they are constrained by a decision to avoid OMOs.  You need OMOs because money really does matter.  The HPE works for currency, if nothing else.  If you want even more inflation, there is no substitute for printing currency."

     "But that’s not the only problem with Steve’s argument, indeed the QTM holds much more than even the preceding example would suggest.  Suppose the differential between the IOR and short-term market rates was always kept very small, say 1 basis point.  At this spread the demand for reserves was very large, say 50% of GDP.  Currency demand is 5% of GDP.  What happens if the central bank permanently doubles the monetary base?  Ireland showed that money is still 100% neutral.  In the long run (once wages and prices have adjusted), all nominal interest rates and interest rate spreads remain unchanged.  NGDP doubles, as does the stock of currency, bank reserves, M1, M2, the price level, the nominal output of the toaster industry, nominal ad revenues earned by Facebook, etc.  Neutral is neutral, there’s no getting around that fact."

     "Don’t worry monetarists; the QTM is not going away."

     http://www.themoneyillusion.com/?p=24597

     He then warns us to disregard the last 5 years as having no bearing on his argument. 

     " Commenters, I’m begging you to avoid bringing up the past 5 years.  If you think they are relevant you have not understood a thing I’ve said here."