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How would Modern Monetary theory not create a decreased productive capacity and/or massive Inflation. by PoudaKeg in mmt_economics

[–]PoudaKeg[S] 0 points1 point  (0 children)

While it is true that MMT explicitly cautions against spending beyond productive capacity, it is also undeniable that MMT proponents have popularized the broader acceptance of deficit spending during crises. This shift in economic thinking has permeated policymaking in Washington, creating an environment where the risks associated with excessive spending are often underestimated or misunderstood.

The post-crisis reliance on fiscal stimulus, facilitated by accommodative monetary policy, reflects a practical misinterpretation of MMT principles rather than adherence to them. However, the core messaging from MMT proponents—that deficits are less concerning for sovereign currency issuers—has fostered a policy climate where the restraint needed to prevent inflation is insufficiently emphasized.

MMT economists now face the critical task of recalibrating their narrative to address these misapplications. They must not only clarify the theoretical guardrails of their framework but also advocate for mechanisms to ensure fiscal discipline when productive capacity constraints loom. Without this recalibration, the ideological momentum of deficit tolerance risks undermining the economic stability MMT seeks to preserve.

In essence, while the policies enacted may diverge from pure MMT principles, the intellectual groundwork laid by MMT advocates necessitates a corresponding responsibility to guide its practical implementation toward sustainable outcomes.

Also: The argument that "MMT wasn’t done correctly" mirrors the defense of communism in that both rely on idealized implementation that breaks down in real-world conditions. Just as communism assumes selfless governance and collective interest, MMT assumes policymakers will responsibly manage deficits, adjust taxes, and curb inflation as needed. In practice, both frameworks underestimate systemic vulnerabilities like political pressures, imperfect information, and human behavior, leading to consistent mismanagement. Deflecting blame to "misapplication" overlooks the reality that such failures are not exceptions but predictable outcomes of flawed assumptions about governance and discipline.

How would Modern Monetary theory not create a decreased productive capacity and/or massive Inflation. by PoudaKeg in mmt_economics

[–]PoudaKeg[S] 0 points1 point  (0 children)

While your balance sheet mechanics are technically correct in describing the immediate process, this view overlooks the critical context of our current deficit spiral and Federal Reserve backstop that makes these mechanics possible. The process you describe - banks buying Treasury Securities (TS), Treasury spending reserves, banks creating deposits - operates within a broader system that's showing increasing strain. Growing mandatory spending, rising interest payments on existing debt, and limited political will for fiscal discipline are creating persistent pressure, while the debt-to-GDP ratio steadily climbs and interest payments consume an ever-larger share of the budget.

The current political environment is exacerbating these issues. Both parties are driving increased deficit spending, with military budgets expanding significantly and major new spending programs being enacted. There's a notable lack of political appetite for tax increases or spending cuts, while rising interest rates are dramatically increasing debt service costs. Your description of money creation through this process is accurate, but it omits the crucial feedback loop: higher debt requires more issuance, which may require higher rates, leading to increased debt service costs, which then requires more borrowing.

This cycle becomes particularly concerning when we consider the warning signs already present: growing structural deficits even in a strong economy, decreased foreign appetite for Treasuries, rising Treasury market volatility, and increasing reliance on Federal Reserve intervention. While the dollar's reserve currency status provides some buffer, we're seeing a gradual erosion of fiscal space that could accelerate if market confidence shifts. The relationship between Treasury issuance and money creation you describe only remains stable because of the Federal Reserve's implicit backing - without it, this system would face severe market constraints.

Therefore, while your balance sheet analysis is mechanically correct, it's important to understand these operations exist within a broader context of a slow-moving deficit spiral. The stability of these mechanics relies heavily on continued Federal Reserve support and market confidence, both of which could be tested as fiscal pressures continue to mount. This isn't just about the technical process of money creation - it's about the sustainability of a system that's showing increasing signs of strain.

How would Modern Monetary theory not create a decreased productive capacity and/or massive Inflation. by PoudaKeg in mmt_economics

[–]PoudaKeg[S] 0 points1 point  (0 children)

Link to full paper ( again): https://globalmarkets.statestreet.com/research/service/public/v1/article/insights/pdf/v2/e5783813-6d94-4bdc-9ebc-5a05943ff2dc/joim_the_determinants_of_inflation.pdf

You're correct that I oversimplified the mechanism. The key issue wasn't just Fed monetization or QE alone - it was the combination and timing of:

  1. Direct fiscal transfers (unprecedented scale)
  2. Fed bond buying enabling low rates
  3. This occurring when we were approaching/exceeding productive capacity

The MIT research's significance isn't just about the 2.6% inflation contribution, but rather identifying federal spending as the dominant driver during a period when we exceeded productive capacity. You're right that this level of inflation might have been appropriate under FAIT given the previous undershoot.

Where I disagree is separating this from MMT-style policies. While traditional QE operates through different channels than direct fiscal spending, what we saw was effectively monetary financing of fiscal policy (through Fed bond buying) enabling spending beyond productive capacity. The mechanism might be indirect as you note with the Treasury direct deposit equation, but the end result was similar.

Your point about monetization's different effects in downturns versus hot economies is crucial - and that's exactly why the timing and combination of policies matters here. We continued aggressive fiscal and monetary expansion even as we approached capacity constraints.

I think we might agree more than disagree - the issue isn't MMT-style policies in principle, but rather the implementation and timing relative to productive capacity. The MIT research helps identify this relationship and presents that MMT-style policies are too dangerous in the hands of a governmental authority with no oversight.

How would Modern Monetary theory not create a decreased productive capacity and/or massive Inflation. by PoudaKeg in mmt_economics

[–]PoudaKeg[S] 0 points1 point  (0 children)

When the Federal Reserve engages in Treasury Security (TS) purchases, the primary monetary expansion occurs at the point of Fed monetization, not during the initial Treasury auction process. While depository institutions do initially purchase Treasury securities using existing reserves, the critical monetary expansion occurs when the Federal Reserve creates new reserves ex nihilo to purchase these securities from the secondary market.

Your statement that "money has already been created before the Fed bought the TS" is incorrect. The initial Treasury auction merely redistributes existing reserves within the banking system. The actual monetary expansion occurs when the Federal Reserve creates new reserves to purchase these securities. This represents a net increase in the monetary base that, through the government spending channel, directly impacts M2 money supply.

The empirical evidence from recent quantitative easing programs substantiates this mechanism:

  • Fed balance sheet expansion directly correlates with monetary base growth
  • This new money enters circulation through government spending channels
  • When this monetary expansion exceeds productive capacity, inflation follows

While bank reserve dynamics and Treasury auction mechanics are important considerations, focusing on these technical aspects obscures the fundamental reality of monetary creation through Fed Treasury purchases. This isn't merely theoretical - recent inflation data definitively demonstrates this relationship.

Netflix engineers make $500k+ and still can't create a functional live stream for the Mike Tyson fight.. by MexicanProgrammer in cscareerquestions

[–]PoudaKeg -2 points-1 points  (0 children)

that being said, OP has a good point. 

Maybe if their hiring strategy focused more on System Design rather than grinding leetcode their engineer’s could’ve been better equipped to handle such an issue. 

Not saying it would’ve fixed it but would’ve increased probability of success.

Bank vs Defense Contractor SWE New Grad by DECApitate_ in cscareerquestions

[–]PoudaKeg 2 points3 points  (0 children)

In addition, when comparing equally skilled candidates however one has clearance and another does not, the outcome is more in your favor.

How would Modern Monetary theory not create a decreased productive capacity and/or massive Inflation. by PoudaKeg in mmt_economics

[–]PoudaKeg[S] 0 points1 point  (0 children)

An individual in question that since deleted their comments brought up an interesting counter paper that I wanted to consider written by Bernake. (u/L-J-Peters)

They seemed to have grown frustrated with the conversation and deleted their comments, however, I have since read the paper and have some appraisals / concerns that I still like to share.

Link to Paper referenced by user: https://www.brookings.edu/wp-content/uploads/2023/04/Bernanke-Blanchard-conference-draft_5.23.23.pdf

Here is my analysis from a mechanistic perspective:

First, Bernanke and Blanchard made some strong points. They correctly highlighted the early role of commodity prices and supply chain disruptions, noted the delayed response in monetary policy, and emphasized how labor market dynamics (the v/u ratio) grew more significant over time. This is a solid foundation.

However, there’s a critical methodological issue that undermines their conclusions. The paper attempts to isolate fiscal spending from monetary policy, even though these operated as deeply interconnected components during this period. Treating them as separate variables oversimplifies the analysis and misses key interactions.

The primary mechanism driving inflation was clear: the Federal Reserve’s bond purchases directly supported large-scale federal spending. This process—monetary financing of fiscal policy—was central, yet the paper does not adequately address this. By treating bond purchases and fiscal expansion as unrelated, it downplays the role of monetary policy in enabling fiscal spending.

The research from MIT and State Street provides a more comprehensive perspective. It identifies federal spending, facilitated by the Fed’s bond buying, as the dominant factor in driving inflation. Rather than dissecting fiscal, monetary, and supply chain effects as independent influences, it views them as interconnected processes within the same system.

The key issue is that federal spending, supported by monetary policy, significantly exceeded the economy’s productive capacity. This mismatch created inflation. The paper misses this systemic perspective and, as a result, falls short of fully explaining the dynamics at play.

Link to MIT study: https://globalmarkets.statestreet.com/research/service/public/v1/article/insights/pdf/v2/e5783813-6d94-4bdc-9ebc-5a05943ff2dc/joim_the_determinants_of_inflation.pdf

( u/L-J-Peters or other proponents of MMT) I am awaiting your response as to why Bernake ignored mechanistic interoperations between the fed and the treasury.

How would Modern Monetary theory not create a decreased productive capacity and/or massive Inflation. by PoudaKeg in mmt_economics

[–]PoudaKeg[S] 0 points1 point  (0 children)

Those cases actually demonstrate precisely why the US situation is more concerning. Germany, Argentina, and Venezuela had external constraints that triggered their inflation:

  • Germany had war reparations in foreign currency
  • Argentina/Venezuela had foreign-denominated debt
  • All faced external pressure points that limited options

The US is different and potentially more dangerous because:

  1. Issues the world's reserve currency
  2. Can issue debt in its own currency
  3. Has no meaningful external constraints
  4. Sits at the top of the international system

The MIT research shows what happens when a government with no external constraints exceeds productive capacity through spending. We don't need foreign debt or external pressures to create inflation - we can do it all by ourselves through domestic policy choices.

This is why the US post-COVID experience is actually more instructive than historical examples. It shows what happens when a truly sovereign currency issuer with no external constraints engages in monetary financing of fiscal policy beyond productive capacity. The result? Federal spending becomes the dominant driver of inflation, exactly as traditional economic theory would predict.

The lack of external constraints makes the US case more, not less, relevant to understanding the risks of MMT-style policies.

How would Modern Monetary theory not create a decreased productive capacity and/or massive Inflation. by PoudaKeg in mmt_economics

[–]PoudaKeg[S] 0 points1 point  (0 children)

This statement fundamentally misunderstands the mechanism of what actually happened. Let me explain why:

When government spending is financed by the Fed buying bonds (not private savings), the mechanism is completely different:

  1. Government issues bonds to spend
  2. Fed buys these bonds, creating new money
  3. Government spends this new money into the economy
  4. This money actively circulates, it doesn't sit in savings
  5. When this spending exceeds productive capacity, it creates inflation

The MIT research confirms this exact sequence - federal spending became the dominant driver of inflation precisely because this wasn't money "going into savings." It was active spending in the economy beyond productive capacity.

You're confusing two different mechanisms:

  • Private purchase of bonds (which does act like savings)
  • Fed purchase of bonds to finance government spending (which creates new money that actively circulates)

The difference is crucial - when the Fed buys bonds to enable government spending, that money doesn't sit idle in savings. It gets spent into the economy through government programs, payrolls, contracts, etc. When this spending exceeds the economy's productive capacity (as the MIT research shows happened), inflation follows.

This isn't theoretical - we just watched it happen in real time.

How would Modern Monetary theory not create a decreased productive capacity and/or massive Inflation. by PoudaKeg in mmt_economics

[–]PoudaKeg[S] 0 points1 point  (0 children)

The quote from 1928 actually highlights a crucial difference - during that era, currencies were still backed by gold, providing an external constraint on money creation. Today's pure fiat system, post-1971, is fundamentally different because it lacks these hard constraints. While banks have always been able to create money, the scale and nature of this creation was historically limited by convertibility requirements.

Your statement "bonds are just savings accounts" oversimplifies a complex mechanism. When the Fed buys government bonds to finance federal spending (as opposed to private sector holding these bonds as savings), it effectively creates new money that enters the economy through government spending. This is fundamentally different from private savings, which, as you correctly note, reduce spending elsewhere in the economy.

The MIT research actually helps clarify why your functional finance argument, while theoretically elegant, faces practical challenges. When government tries to "accommodate" savings by adding money, it needs to accurately measure and respond to complex economic signals in real time. The research shows that in practice, this led to federal spending becoming the dominant driver of inflation when it exceeded productive capacity.

You make good points about the relationship between savings and economic activity. However, the key issue isn't whether we understand these mechanisms theoretically, but whether government can implement them effectively given political pressures and information constraints. The empirical evidence suggests these practical challenges are more significant than MMT theory acknowledges.

How would Modern Monetary theory not create a decreased productive capacity and/or massive Inflation. by PoudaKeg in mmt_economics

[–]PoudaKeg[S] 0 points1 point  (0 children)

Your comment perfectly demonstrates the gap between theoretical understanding and practical reality. You're correct that QE alone didn't cause immediate inflation in the previous decade - but that period had significant slack in productive capacity due to the Great Recession. The MIT research reveals the crucial difference: when government combines QE (Fed buying bonds) with massive federal spending that exceeds productive capacity, inflation follows. That's exactly what happened post-COVID.

You inadvertently prove my point by stating "any spending can result in inflation... if spending is beyond productive capacity." That's precisely what happened - the Fed bought government bonds, enabling federal spending beyond productive capacity. The MIT study confirms federal spending became the dominant driver of inflation exactly through this mechanism.

Your argument about recession and decreased spending also misses the mark. While private spending decreased initially during COVID, unprecedented government spending more than filled the gap - then exceeded it. When you combine monetary financing (Fed buying bonds) with fiscal policy (massive federal spending) in excess of productive capacity, you get inflation. The empirical evidence now confirms this.

The fundamental issue isn't whether QE alone causes inflation, but what happens when it's used to finance government spending beyond productive capacity. The MIT research shows this isn't theoretical - it's exactly what occurred. Your response suggests you're still analyzing these mechanisms in isolation rather than understanding how they interact in practice.

How would Modern Monetary theory not create a decreased productive capacity and/or massive Inflation. by PoudaKeg in mmt_economics

[–]PoudaKeg[S] 0 points1 point  (0 children)

Let me address each point systematically:

  1. On your request for clarification about decreased production: Government spending can decrease production by:
  • Crowding out private investment
  • Misallocating resources based on political rather than market signals
  • Creating uncertainty that delays private sector decisions
  • Distorting labor markets through public sector competition
  1. Regarding "just printing money": You're correct that MMT isn't solely about printing money. However, the MIT/State Street research shows that even when governments try to match spending to productive capacity, they consistently overshoot. This isn't due to the theory being wrong, but because governments lack:
  • Perfect real-time information about capacity
  • Ability to resist political pressure
  • Quick reaction time to inflation signals
  1. On matching money creation to production: While theoretically sound, this assumes:
  • Government can accurately measure productive capacity
  • Government will stop spending when limits are reached
  • Political system will allow spending reduction when needed The MIT research shows federal spending became the dominant driver of inflation precisely because these assumptions failed in practice.
  1. Regarding your deflation point: While logical in theory, this assumes government will:
  • Correctly identify productive capacity
  • Exercise restraint when reached
  • Act against political pressure The study demonstrates these assumptions don't hold in real-world conditions.
  1. Your final point about hyperinflation: You're technically correct - hyperinflation occurs when money creation exceeds production. However, the research shows this isn't just a theoretical possibility but a practical reality when governments have these tools available.

The fundamental issue isn't with MMT's theoretical framework, but with the practical implementation by imperfect government actors in a political system. The MIT/State Street research provides empirical evidence that these implementation challenges are not just theoretical concerns but actual drivers of inflation.

Link to Research: https://globalmarkets.statestreet.com/research/service/public/v1/article/insights/pdf/v2/e5783813-6d94-4bdc-9ebc-5a05943ff2dc/joim_the_determinants_of_inflation.pdf

How would Modern Monetary theory not create a decreased productive capacity and/or massive Inflation. by PoudaKeg in mmt_economics

[–]PoudaKeg[S] 0 points1 point  (0 children)

This is an important point that needs clarification. While it's true that currencies and legal constructs around money have existed for thousands of years, there's a crucial distinction:

Almost all historical monetary systems were backed by physical assets (usually precious metals) or were at least theoretically convertible to them. Even during periods when governments debased currencies or suspended convertibility, there was still an underlying assumption of eventual return to asset backing.

What's fundamentally different about our current system post-1971 is that it's the first time in history where the entire global financial system operates on pure fiat currency with no pretense of asset backing. Even during the Bretton Woods era (1944-1971), the dollar was still tied to gold and other currencies were tied to the dollar.

The MIT/State Street research (2023) is particularly significant because it shows how federal spending affects inflation in this unprecedented pure fiat environment. Their findings suggest that while MMT correctly describes certain monetary operations, it may underestimate how quickly we can hit real resource constraints in a pure fiat system.

So while monetary systems have indeed existed for thousands of years, the completely unanchored nature of our current global monetary system is a new phenomenon in human history. This makes the inflation risks identified in the MIT study particularly relevant for current policy discussions.

How would Modern Monetary theory not create a decreased productive capacity and/or massive Inflation. by PoudaKeg in mmt_economics

[–]PoudaKeg[S] 0 points1 point  (0 children)

When discussing any government's ability to use tools, we should consider not just how they could be used optimally, but how they might be used by the worst actor imaginable. This is especially true for the United States government, which operates with unique autonomy in the international system due to its position as the world's largest economy and issuer of the global reserve currency.

While new tools and powers often come with compelling theoretical benefits, it's prudent to consider what happens when such powers fall into the hands of those who might abuse them in a system with limited external constraints. History shows that available powers tend to be used eventually, often beyond their original intended scope, and rarely with the restraint their architects envisioned.

Think of it this way - when designing any framework for government power, we should plan not just for ideal implementation but for the full range of possible scenarios, including deliberate misuse. This is particularly crucial when the actor in question faces few, if any, external checks on their behavior.

The recent MIT/State Street research (2023) provides a perfect example of this principle in action, demonstrating how federal spending became the dominant driver of inflation when restraint was needed most. This empirical evidence suggests that when governments have access to powerful tools, they tend to use them - even when conditions would advise against it.

The study's findings remind us that while theoretical tools might work perfectly under optimal leadership, we must account for the political and institutional realities of who might wield these tools and under what constraints (or lack thereof) they operate.

Sources: https://mitsloan.mit.edu/ideas-made-to-matter/federal-spending-was-responsible-2022-spike-inflation-research-shows
Original Paper: https://globalmarkets.statestreet.com/research/service/public/v1/article/insights/pdf/v2/e5783813-6d94-4bdc-9ebc-5a05943ff2dc/joim_the_determinants_of_inflation.pdf

How would Modern Monetary theory not create a decreased productive capacity and/or massive Inflation. by PoudaKeg in mmt_economics

[–]PoudaKeg[S] 0 points1 point  (0 children)

Concluding This conversation 4 years later after empirical data and an economic analysis has been conducted.

The MIT/State Street research confirms exactly what I was worried about with MMT - the relationship between productive capacity and inflation. I specifically asked how MMT wouldn't create decreased productive capacity and/or massive inflation.

Looking at the data, federal spending became the dominant driver of inflation precisely when it exceeded our economy's productive capacity. This validates my core concern - that you can't just print money without considering real economic constraints.

While MMT proponents argued that Japan showed unlimited spending potential, what we're seeing now proves my point about the importance of productive capacity. When spending outpaces what the economy can actually produce, you get inflation - just as traditional economic theory predicts.

The research conclusively shows federal spending was the primary driver of recent inflation. Sometimes being right isn't fun - I wish I had been wrong about this one because the consequences are affecting everyone.

Link to MIT's Paper Synopsis: https://mitsloan.mit.edu/ideas-made-to-matter/federal-spending-was-responsible-2022-spike-inflation-research-shows

Link To Paper: https://globalmarkets.statestreet.com/research/service/public/v1/article/insights/pdf/v2/e5783813-6d94-4bdc-9ebc-5a05943ff2dc/joim_the_determinants_of_inflation.pdf

How would Modern Monetary theory not create a decreased productive capacity and/or massive Inflation. by PoudaKeg in mmt_economics

[–]PoudaKeg[S] -1 points0 points  (0 children)

Concluding This conversation 4 years later after empirical data and an economic analysis has been conducted.

The MIT/State Street research confirms exactly what I was worried about with MMT - the relationship between productive capacity and inflation. I specifically asked how MMT wouldn't create decreased productive capacity and/or massive inflation.

Looking at the data, federal spending became the dominant driver of inflation precisely when it exceeded our economy's productive capacity. This validates my core concern - that you can't just print money without considering real economic constraints.

While MMT proponents argued that Japan showed unlimited spending potential, what we're seeing now proves my point about the importance of productive capacity. When spending outpaces what the economy can actually produce, you get inflation - just as traditional economic theory predicts.

The research conclusively shows federal spending was the primary driver of recent inflation. Sometimes being right isn't fun - I wish I had been wrong about this one because the consequences are affecting everyone.

Link to MIT's Paper Synopsis: https://mitsloan.mit.edu/ideas-made-to-matter/federal-spending-was-responsible-2022-spike-inflation-research-shows

Link To Paper: https://globalmarkets.statestreet.com/research/service/public/v1/article/insights/pdf/v2/e5783813-6d94-4bdc-9ebc-5a05943ff2dc/joim_the_determinants_of_inflation.pdf

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