The Most Marvelous Thing (MMT)

The most marvelous thing to come out of blogging is the dissemination of modern monetary theory (MMT).  MMT explains how the economy really works.  I was an economics major in college (University of Michigan, 1974) specializing in macroeconomics, but I never really learned how the economy works until I started reading the MMT blogs about 4 years.

One of my favorite blogs on the web is Kevin Drum'g blog on Mother Jones.  Kevin is a political blogger, and not an expert on economics.  Over the years I've seen him pose a number of questions about economics on his blog.  As the years went by, I noticed, to my amazement, that I was able to answer his questions, using the information I had learned at the MMT blogs.  Here are some examples:

• What is money?
• How do banks work?  How does money get created and destroyed?
• Will the bond vigilantes strike against U.S. Treasury bonds?
• How important is it to balance the fiscal budget?
• What is the best way to manage the U.S. economy?
• What does the Federal Reserve do?  How much power do they have?  Are they part of the U.S. government?
• What is quantitative easing?  Will it stimulate the economy?  Can the Fed do more?  How about nominal GDP targeting?

If anybody wants answers to any of these questions, let me know.  Just don't be like Kevin Drum  and get some sort of mental block preventing comprehension of perfectly straightforward concepts.  That gets tiring.  

But read Kevin anyway.  Like I said, his blog is my favorite...

Blog About Japan -- Deployment

Deployment -- combo of deflation and high levels of employment.  Opposite of stagflation.  That's the ongoing "disaster" in Japan.

UPDATE:  Here's a sobering article:
Has Chinese Currency Manipulation Succeeded in Breaking Japanese Manufacturers?

My takeaway is that the conventional wisdom, as represented to some extent by the Economist, remains far removed from reality.  We may be on the verge of a deflationary trap, and the serious people are worrying about big government and deficit.  See Japan:

Meanwhile, the brutal deflation that accompanied the bust persists. Falling prices have translated into massive wealth destruction. Stop-and-go monetary and fiscal stimulus accomplished little. Consumer prices have declined for seven of the past 10 years. 

There is no clear path out of the deflationary trap. Federal Reserve Chairman Ben Bernanke, then a professor at Princeton, counseled the Japanese in 1999 to open the monetary floodgates. “Japanese monetary policy,” he wrote, “seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work.”

Japanese officials counter that they’ve tried monetary stimulus, including zero interest rates and quantitative easing, but had meager results.
Richard Koo, chief economist at Nomura Research in Tokyo, argues that because Japan is stuck in a balance-sheet recession in which companies and households are retrenching, low interest rates are not stimulative because neither businesses nor households wish to borrow. He advocates massive fiscal stimulus, saying government spending is the only way to put a floor under sagging aggregate demand. Critics say past fiscal stimulus has ballooned the national debt to 200% of GDP.

Actually, Japan has low unemployment and zero inflation, with universal health care and good infrastructure.  Japan just totally fucks with the conventional wisdom in a number of respects.  The ration of GDP to national debt is totally irrelevant to the economic welfare of the country, while the universal and affordable national health care is something I wish we had here in the U.S.
Some lessons from Japan:

- monetary policy, using low interest rates and QE, can't always generate inflation
- national debt as a percent of GDP is irrelevant
- there is more to economic well-being than fast GDP growth