May 8, 2019

Settling the MMT―Inflation issue for good

Comment on Bill Mitchell on ‘US Congress hypocrites lose the plot’

Blog-Reference and Blog-Reference on May 9

Bill Mitchell quotes five Republican Senators in the US Congress as proclaiming it is: “the duty of the Senate to condemn Modern Monetary Theory and recognizing that the implementation of Modern Monetary Theory would lead to higher deficits and higher inflation”.

Science is something quite different from politics and senators have NOTHING AT ALL to say in the realm of science. People forget this because they have come to think that political blather, talk show, and scientific debate is essentially the same thing. This is partially the fault of economists themselves, who for the greater part lack a proper understanding of what science is all about.

Economic discussions suffer from the fact that both microfoundations and macrofoundations are provably false. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism, MMT ― are materially/formally inconsistent and mutually contradictory. This is why all economic discussions end in the bottomless swamp of cross-talk, interpretation, exegesis, second-guessing, and “what x REALLY meant” but for some mysterious reason could not clearly express.

To get out of the proto-scientific swamp requires a Paradigm Shift, i.e. the move from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations.#1

From the true macrofoundations follows the macroeconomic Law of Supply and Demand as shown on Wikimedia.#2 It says in the elementary case:

(i) An increase in the expenditure ratio ρE≡EC/Yw leads to a higher market clearing price (the Greek letter ρ stands for ratio). An expenditure ratio ρE > 1 indicates deficit-spending/dissaving/credit-expansion, a ratio ρE less than 1 indicates saving/credit-contraction. Dissaving/saving, in turn, affects the average amount of transaction money M.

(ii) Deficit spending, i.e. the move from ρE=1 to ρE >1 causes a one-off price hike but NOT inflation† if the deficit spending is exactly repeated period after period.#3, #4, #5, #6 A steadily rising public debt is compatible with price stability after the first hike. Only successively INCREASING budget deficits produce continuous price increases.

(iii) An increase in the ratio of wage rate to productivity W/R leads to a higher market clearing price P. If this is repeated period after period one gets inflation depending on the rates of change of W and R in each successive period.

Roughly speaking, the macroeconomic Law of Supply and Demand explains the price level in the elementary production-consumption economy and its development over time. The equation contains but measurable variables and is therefore testable in principle.

The relationship between the average amount of fiat money M and the expenditure ratio ρE, the wage rate W and employment L is shown on Wikimedia.#7

Because M is the dependent variable it does NOT cause inflation. This puts the commonplace Quantity Theory to rest.

Conclusion: The MMT policy of deficit-spending/money-creation causes a one-off price hike but NOT inflation. The lethal effect of MMT policy is on distribution.#8, #9, #10 The Weimar/Zimbabwe/Inflation shouters suffer from incurable idiocy and cannot be admitted to a serious economic discussion. The fact is that MMT policy does NOT produce inflation but, according to the macroeconomic Profit Law Public Deficit = Private Profit,  the Oligarchy’s financial wealth (currently about $22 trillion and counting). This public debt is the own handiwork of nobody else than the US Congress and all worked just fine without inflation.

Egmont Kakarot-Handtke

† "In economics, inflation refers to a general progressive increase in prices of goods and services in an economy." (Wikipedia) A price hike refers to one period, inflation means successive price hikes over two or more periods with the rates of price changes being equal or increasing. Strictly speaking, the minimum length of inflation is two periods. The standard period length is the calendar year.

#1 This is the correct core of macroeconomic axioms: (A0) The objectively given and most elementary systemic 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) EC=PX consumption expenditure EC is equal to price P times quantity bought/sold X.
For a start X=O, i.e. market-clearing holds. The ratio ρE≡EC/Yw is called expenditure ratio; ρE=1 indicates budget-balancing of the household sector.
#2 Wikimedia AXEC101 Law of Supply and Demand, elementary production-consumption economy with market-clearing and zero distributed profits.
#3 Gov-Deficits do NOT cause inflation
#4 How some MMTers got inflation wrong
#5 MMT and the inflation-red-herring
#6 Economics as tireless production of proto-scientific garbage: inflation theory as an example
#7 Wikimedia AXEC111b Average quantity of transaction money
#8 Deficits matter for distribution
#9 MMT: Distribution is the drawback NOT Inflation
#10 Dear idiots, government deficits do NOT cause inflation

Related 'What Keynes really meant but could not really prove' and 'Quixotic Keynes exegesis' and 'Inflation: back to basics' and 'A la recherche de l'inflation perdue' and 'The unintended consequences of deficit spending' and 'MMT: fundamentally false' and 'MMT: A free lunch for the Oligarchy' and 'Links on Inflation'.


Wikimedia AXEC182a Macroeconomic price P and profit Qm as a function of the expenditure ratio ρE (and the other variables) with ρ>1 meaning deficit spending.


Twitter May 29 Michael R. Strain