May 25, 2018

Additional proof of MMT’s inconsistency

Comment on Tom Hickey on ‘Bill Mitchell — A surplus of trade discussions’

Blog-Reference and Blog-Reference

Bill Mitchell argues: “MMT economists are not unique in their focus on real things rather than nominal things, although we certainly differ from the mainstream in that there are situations where the nominal level is crucial to understanding the consequences of a change. … Giving some real thing away is a cost. Getting some real thing is a benefit. That doesn’t equate, as I have been reading the last few weeks, in a conclusion that MMT’s preference is for a nation to have a current account deficit. It just states the obvious fact that exports, by definition, involve sacrificing real resources and depriving a nation of their use. Imports on the other hand clearly involve receiving final goods and services where the real resource sacrifice has been made by the exporting nation.”

This is the real argument. Let us now turn to the nominal argument. MMT’s sectoral balances equation/national income identity is given with (X−M)+(G−T)+(I−S)=0 (i).#1

From equation (i) follows (G−T)=S (ii) for the simplified case X, M, I = 0.

This means: “Based on the national income identity, MMT states that it is possible for the non-government sector to accumulate a surplus [S] only if the government runs budget deficits [G−T greater than 0]. As most private sectors want to accumulate a surplus, MMT economists usually advocate for government budget deficits.”#2

From equation (i) follows (X−M)=S (iii) for the simplified case G, T, I = 0.

In nominal terms, a foreign trade surplus [X−M greater than 0] is absolutely equivalent to a government deficit. By logical consequence, MMT should not only advocate government deficits but also export surpluses. This is not the case, an export surplus means for MMTers that a “real resource sacrifice has been made by the exporting nation.”

Conclusion: The recent discussion about foreign trade#3 confirms that MMT is logically defective in all dimensions.#4 This means that MMTers do NOT understand how the monetary economy works. This confirms what has already been established elsewhere: MMT is proto-scientific garbage.#5

Egmont Kakarot-Handtke

#1 Down with idiocy!
#2 Wikipedia, Modern Monetary Theory
#3 Steve Keen, MMT’s ignorance of economic thought
#4 Rectification of MMT macro accounting
#5 How MMT enlightens Washington

Related 'Everything you know about MMT is wrong' and 'MMT is idiocy and fraud' and 'Wikipedia, economics, scientific knowledge, or political agenda pushing?'


Additional proof of MMT’s inconsistency (II)

Blog-Reference on May 26

The preceding post (I) concluded: “This means that MMTers do NOT understand how the monetary economy works.” More specifically, MMTers have no idea how the real and nominal variables of the monetary economy interact. This inevitably leads to the question, how, then, does the monetary economy work?

Economics is axiomatically false, therefore, it has to be reconstructed from scratch. As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. Under the conditions of (C1) market-clearing X=O and (C2) budget-balancing C=Yw the price is given by P=W/R, i.e. the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. The axioms define the interaction between real and nominal variables. More details and a graphical representation have been given elsewhere.#1

In order to deal with foreign trade, two economies are needed. For a start, it is assumed that we have the USA and Europe. Both are described by the axioms (A1)/(A3) and the conditions (C1)/(C2). Both economies are identical, except for the currency. For a start, we have an exchange rate 1$ = 1€. So, both economies differ only in nominal terms.

Initially, the national accounting balance of the US household sector is balanced, i.e. C=Yw [$]. Now, the consumers decide that they want more stuff and that they want to buy it from Europe.

Things unfold now in the most elementary case as follows:
(i) The US household sector takes credit at the US central bank of the amount EX $.
(ii) The balance sheet of the US central bank lengthens: household sector’s overdrafts EX are equal to household sector’s deposits.
(iii) The US central bank turns to the EU central bank in order to get Euros.
(iv) The balance sheet of the EU central bank lengthens: US central bank’s overdrafts in $ are equal to US central bank’s deposits at the EU central bank in €, i.e. = EX.
(v) The US central bank switches the US household sector’s $ deposits for € deposits at the EU central bank.
(vi) As a result, the US households have $ overdrafts at the US central bank and € deposits at the EU central bank. On the other hand, the EU central bank has $ deposits at the US central bank.
(vii) Finally, the US household sector spends the € deposits in Europe.

Initially, national accounting in Europe and the USA looked like this: Qm≡C−Yw and Sm≡Yw−C or Qm≡−Sm, Legend: Qm monetary profit, Sm monetary saving in € resp. $.#2 With the additional spending of the US households this gives for the European business sector Qm=C+EX−Yw or Qm≡EX−Sm.

Initially, Qm in the EU has been 0 because of budget balancing, just as in the US. It is now assumed for a start that EU households spend less, i.e. save, thus that Sm exactly compensates the additional spending of US households, i.e. Sm=EX. As a result, the business sector’s profit Qm is again zero, just as in the initial period.

At the end of the period, EU households have deposits at the EU Central Bank and US households have overdrafts at the US Central Bank. EU households have given up part of the real output O in Europe = Sm in nominal terms. As a mirror image, US households have increased real consumption and gone into debt vis-a-vis the EU households.

Economically, EU households have lent real stuff to US households. On the accounts of the central banks, the whole transaction comes down as an increase of $ assets at the EU central bank.

At some point in time, the whole transaction has to be reversed. That is, the US households have to return real stuff and redeem their debt. In this case, the US runs an export surplus and the EU a deficit. So, at the end of the whole process, all real and nominal balances are balanced. And this is exactly as it should be. The whole process comes down to a time shift of real consumption between two countries.

Needless to emphasize that a lot of practical problems arise if the US cannot, for whatever reasons, achieve an export surplus and finally redeem the debt. No problems arise, of course, as long as the EU central bank holds the debt = $-assets for an indefinite time.

In the case that the EU households do not exactly save the amount the US households spend, i.e. Sm less than EX, the profit of the EU business sector becomes greater than 0, i.e. Qm≡EX−Sm is positive. In this case, the market-clearing price in the EU rises. The US business sector is neither affected in real nor in nominal terms. There is no loss of employment because of the trade balance deficit.

MMTers neither get the real nor the nominal nor the monetary side of the whole process right. To recall, the MMT balances equation is provably false because MMTers are too stupid to understand the elementary mathematics of national accounting.#3

#1 True macrofoundations: the reset of economics
#2 Rectification of MMT macro accounting
#3 For the full-spectrum refutation of MMT see cross-references MMT