Ep. 130 Rohan Grey Does a Deep Dive on Legality and Theory of MMT and Trillion Dollar Platinum Coin
In a very comprehensive discussion, Bob talks with Rohan Grey, Assistant Prof. of Law at Willamette University. Rohan is an expert on the history of US fiscal and monetary legislation, as well as Modern Monetary Theory (MMT).
Mentioned in the Episode and Other Links of Interest:
- The YouTube version of this interview.
- Rohan Grey’s CV, and his paper on the history of US coinage.
- Rohan’s presentation on money as a creature of the law, not the State.
- Jon Stewart rips Paul Krugman on the trillion dollar platinum coin.
- Bob’s original book review at Mises.org of Stephanie Kelton’s book on MMT. George Selgin’s response, which in turn prompted this post from Nathan Tankus.
- Kelton’s book, The Deficit Myth. #CommissionsEarned (As an Amazon Associate I earn from qualifying purchases.)
- Bob’s older critique of an MMT accounting argument.
- Bob Murphy Show ep. 18, interview with Warren Mosler.
- Bob’s critique of fractional reserve banking.
- Bob on Bob Higgs on World War 2 (a portion of the presentation).
- Help support the Bob Murphy Show.
The audio production for this episode was provided by Podsworth Media.
About the author, Robert
Christian and economist, Chief Economist at infineo, and Senior Fellow with the Mises Institute.
My takeaway from Rohan: MMT is economic utilitarianism, analogous to ethical utilitarianism. The epistemology and process don’t matter, it’s only the outcome that matters. To be more specific I think it’s the short-term outcome in particular that is decisive in the MMT worldview.
Bob, isn’t there any credence to Rohan’s argument that deficit spending / money printing is not necessarily inflationary if the new money is used to fund productive activity (vs. consumption) that increases the overall output?
I think there is a substantive difference between government deficit spending to pay for food stamps vs. government funding for infrastructure or innovation. The latter could even be deflationary in the long run.
The funding of “productive activity” will divert resources other activity in the private sector or it will recruit “idle” resources not currently in use in the economy.
MMT is utilitarianism Utilitarianism is literally nonsense on stilts.
Further refinement: MMT is economic utilitarianism (analogous to ethical utilitarianism) with only a short-term planning horizon that presumes a methodologically collectivist approach to money and economic activity. What do you think? Is this a fair characterization? Could this be further refined?
The amount of time spent by Austrian economists on MMT is dismaying: they are letting MMTyphus drag them into the weeds of confusion and false accounting.
The simple truth that discredits ‘MMT’ is that they are simply trying to justify a shift from private production, investment and consumption – which enjoys the advantages of alignment with consumer preferences and producer knowledge – to government directed spending which does not.
All arguments must begin and end with this in order to cement the fundamental fact that MMT is a pile of horsepucks.
MMTyphoids try to bolster their claim with the erroneous and discredited trope of ‘taking up slack’ and ‘putting unused production factors to use’. If the market structure of production is, for some reason, misaligned to consumer needs and preferences; if it has ‘underutilized resources’, then they have not made the case that the central planning bureaucracy has the information to put those resources to productive and not destructive uses. Contrarily to this, Austrian Economics shows how the bureaucratic class always and everywhere distorts alignment away from efficiently meeting consumer wants. Do MMTyphoids ever refute this observation? They cannot.
If the problem is a lack of circulating cash, why not give every citizen extra cash to ‘stimulate production? MMT doesn’t answer why the spending preferences of the bureaucrats are superior to those of the citizens.
The argument that “oh the politicians will stop excessive moneyprinting when the ‘slack’ has been used-up doesn’t even pass the LAUGH TEST to anyone who looks at how the State has misappropriated resources like a hopeless drug-addict. It’s absurd. Clownish.
The entire cast of Mises.org has been allowed themselves into meaningless debate, and the trick of the enemy is to throw up a flurry of ‘economic’ language that Austrians imagine that they need to refute in order to ‘be relevant’.
Don’t let yourself get sidetracked by the accounting gimmickry. The argument begins and ends with the realization that MMT is just a pile of malarkey ginned-up to distract from the fact that the socialists / statists want to abgrogate more control of resources away from the private, productive economy.
And please publish this one, Bob…
clort27, even in this comment where you accuse me (and others) of being distracted by the MMT arguments about slack, you (correctly) addressed their claim and said what was wrong with it. MMT is gaining traction and I disagree with you that we should ignore what they say in response to our big picture. Even you yourself don’t follow your advice in this comment.
This was one of my very favorite episodes of your podcast and I can’t wait to hear your follow-up once you’ve had a chance to chew on it a while and fine-tune your approach on MMT. I found Rohan to be a brilliant advocate for the pragmatic function of the banking system and appreciated you letting him tell his whole story–it actually made the Austrian perspective more meaningful for me to catch this vision of the magnificent complexity of the machine that has evolved over the centuries into what it is today.
I’ve really enjoyed seeing Bob become increasingly sophisticated in his attacks against MMT. That is possible because he does listen to his opponents and chew on their ideas. I think it’s great that he is providing analysis for those of us that don’t have time to read Kelton’s book.
If the Austrian school can’t rebuke non-sense like MMT, then what good is it?
I disagree. You don’t win mindshare for your ideas by ignoring competing ideas that are growing in popularity. Everyone here knows various reasons MMT is immoral, economically unsound, etc. Yet outside of these walls MMT is growing in popularity. We ignore that at our own peril. Much better to engage with MMT folks and point out the flaws so as to win converts to our ideas / reduce the spread of their ideas, on the margin. Sitting on the sidelines with our fingers in our ears won’t help win converts or slow the spread of MMT. I know in this podcast Dr. Murphy didn’t point out the flaws, though I think that was a valuable approach in this case to gain a deeper understanding of what the best of the MMTers are claiming.
I’ve been shocked by how many investors have been talking about MMT in the last couple years (accelerating) and the sentiment predicting its rise in the policy establishment. I really think we should take this seriously and also leverage this idea with growing popularity as an excuse to spread our ideas by pointing out how our ideas address shortcomings in their ideas. It’s good marketing to “punch up.”
I believe the official mnemonic is Magic Money Tree.
Sounds like you are agreeing with Rohan there.
He clearly stated that once Congress makes a decision to spend, everything after that is an inevitable juggernaut, moving on mechanical rails. Therefore the only questions that matter are how much Congress decides to spend, and what they spend it on … any government that wants to shift some sector of the economy from private to public (or the reverse), has the choice of doing so. Whether it’s a smart idea is a completely separate question to whether it can be done.
I disagree with Rohan on a number of points … but that’s certainly the overall thesis of MMT, and for the most part they don’t pretend otherwise. Whether this discredits them or not depends largely on what you expect will be done by Congress in response. In a nutshell we could say they believe:
* The central bank is perfectly compliant with the demands of Congress and does not have discretion to apply any “back pressure” onto the spending process.
* The central bank is infinitely capable of keeping the monetary system balanced, regardless of what Congress does … they will never “come unstuck” in a monetary sense.
Both of these beliefs are questionable … Austrians expect economic reality will firmly assert itself at some point in the process, although we have argued long and loud amongst ourselves about exactly where, when and how.
Sorry, this episode was too U.S centrist for my taste.
Bob, “So, what about X?”
Rohan, “But that wasn’t what I’m saying Bob, stop putting words in my mouth, it’s just like a {money market/bar tab/commercial paper/full term insurance/some other financial product}.”
GOTO start–repeat for an hour and a half.
^ I know that wasn’t exactly how this discussion went, but dear me there’s only so many things you can deny before you have no ground left to talk on, right? I left this discussion far more confused about what the MMT position even is than when I started.
If treasuries and dollars are the same under MMT, I am struggling with the pricing and interest mechanics of repos. I understand Rohan’s contention that there are limitations in the financial system that require different instruments to facilitate settlements and payments. Since dollars and treasuries are synonymous but facilitate different transaction types, where settlements and payments require USD, it still makes sense to swap treasuries for dollars. How does this understanding of treasuries and cash address price differential and the need to pay borrowing costs in a repo though?
The price differential can be seen in the fact repos require the borrower to post collateral with a value exceeding the borrowed amount. The haircut protects against collateral devaluation in the event of counterparty defaults. This illustrates a fundamental difference in that the treasuries are valued on a mark-to-market basis versus the nominal value of the borrowed dollars. While Rohan focused on nominal amounts of the debt instruments, I do not believe you guys discussed the differences in the secondary markets, which gives evidence of intrinsic difference beyond the transactions that can be facilitated.
For the sake argument for the second area of potential inconsistency, charging of interest, we will assume the collateral can be re-hypothecated. In a repo, interest is charged to the borrower, and the rate of interest is affected by the length of borrowing and credit worthiness of the borrower. Even if the base rate were 0%, there would still be a margin unless the borrower were considered risk free. Although one could argue that the interest is really just a proxy for the fee charged for facilitating payments by lending cash, given the criteria used to determine the interest rate, this does not stand to reason. The time horizon should not factor into the rate because 1) the treasuries can be converted by lender under rehypo rights and 2) the monetisation occurs at the point of the transaction rather than over the life of the contract. With respect to the credit worthiness of borrower, the perspective put forward by Rohan is that there is not really a credit transaction taking place but rather an asset swap where the only character difference is where one can make payments with the asset. As such, credit worthiness is not really relevant.
The different treatments of valuation and interest for cash and treasuries in a repo could be ascribed to market participants fundamentally misunderstanding that dollars and treasuries are both debt instruments simply with different payment functions, or it could be that cash and debt instruments are inherently different. While it is true that MMTers may be the only ones that have awoken to this paradigm shift, it would be interesting to hear why they think cash and treasuries should be treated differently than they are under current repo transaction. They would also need to explain why the Fed engages in the repo market under the same prevailing false assumptions.
Here are a few questions to ask yourself:
1. What is the ethical standing of voluntary-chosen spending by individual people vs. involuntarily spending imposed on us by government central planners?
2. What is the discovery mechanism of government central planners vs markets? How do you discover what does or doesn’t produce value, and who gets to decide what is or isn’t valuable? Valuable to whom? Valuable when?
3. Will government spending on X always produce X (e.g. innovation), or only sometimes? If only sometimes, how do you evaluate the merits of their choice to force us to pay for their gambling? If it always produces X, why have markets at all — why not prefer government central planning for all things?
4. If we assume government action X is deflationary in the long-run, is that a good thing? What do we say to the people harmed by Cantillon effects in the short-term? What are the downstream unseen consequences of this diversion of resources away from what individuals would choose on their own?
5. If we ignore ethics and economic science entirely and just look at intentions vs results, how would you grade the governments ability to deliver on their intentions in any matter(s) of your choosing? Consider the war on poverty, the war on drugs, the war on terror, the war in Afghanistan, the self-sufficiency of the post office, the homicide solve rate of your local police, the quality of schools, maintaining roads, etc etc etc. Choose whatever thing you want: local, county, state, or federal: do you think they’re generally effective / efficient at achieving their stated intentions?
6. It’s definitely the case that government central planners could in principle take actions that would be inflationary short-term and deflationary long-term. What follows from this? Does that mean it’s a good idea? What are the trade-offs? Who decides? How often will they succeed in practice at achieving this goal?
I wish you and yours all the best — cheers!
One thing that comes up multiple times is the difference between price inflation and (Austrian) monetary inflation.
Is the mainstream/MMT view really that as long as prices don’t rise, increasing the monetary supply is just fine and dandy?
Just intuitively, if I went to the babysitting co-op you mentioned a few episodes ago, and they handed out e.g. 10 tokens at the beginning, and then (without first mentioning this) start printing more tokens that they give to their friends, I would be upset even before any of those new tokens were spent to drive up prices. Or if a company I bought shares in started issuing more shares and diluting mine, but had not yet influenced my share price?
Is this just an Austrian thing to be upset about, and if so, why? It sounds kind of like the difference between violence and potential violence. Just because you haven’t pulled the trigger yet doesn’t mean I’m ok with you putting a gun to my head.
Another thought. It was interesting to see Rohan make very specific distinctions about the structure and different qualities of different monetary instruments, and their “moneyness.”
At the same time, I had the feeling that all of “inflation” was reduced to a single number. This difference in focus of what to look at vs. what to aggregate seems to make a huge difference in economic thinking.
I don’t even think that rising prices are the worst part of printing money. But in discussions with pretty much any non-Austrian, that seems to be the only possible downside, and thus they brush it under the table by reducing it to price inflation and asserting that’s under control.
What about the economic distortions in investment and therefore capital structure? What about the Cantillon effect? I’m sure there are other downsides to printing money that I haven’t thought of.
Do any of the non-Austrians think about these things? I get the impression that they aggregate everything away and thus can’t even conceive of the idea that there might be negative consequences.
Bob came pretty close at the end by asking why we wouldn’t just have every individual and corporation print as much money as they wanted. What’s the reason counterfeiting money is illegal?
Rohan’s answer wasn’t completely besides the point, but it seemed more political than economic. IIRC, he basically said that you’d want the monetary policy in the hands of somebody of a responsible party (the state) to facilitate a monetary environment that people would want to live in.
But of course this points to the fact that there are ways of handling monetary policy that are unattractive and have bad outcomes, and implies that having the state handle it is the best way of getting to good policy. I of course dispute this; putting it into the hands of the state is pretty much the worst way to do it. In fact, if we were to give every person in the US a little printing press, they would probably print LESS money in aggregate than the Fed does now, at least if it required physical bank notes to be printed and not just zeroes on a bank account.
There’s the old story of the ZImbabwean hyperinflation eventually stopping because the value of the currency approached the cost of the paper it was printed on. With digital currency, as the Fed uses nowadays, there is no such limitation.
Rohan mentions a “pension fund” multiple times as an example of an entity that just “invests” money for which there’s no deferred consumption – as if the money just fell from the sky. Yet a pension fund literally contains funds that represent consumption held back at present for future consumption at retirement. The funds are comprised of pension contributions by workers or their employers that could easily be consumed in the present (if the workers opt out of the plan.)
With a normal, well-understood collectable coin issuance … usually coins are purchased by collectors who then provide the liquidity when paying for the purchase (i.e. take the asset and then refrain from consumption). The nominal value of the coin remains constant … stamped into the metal … but generally the market value of the collectable coin goes up, and indeed the capital gain ends up taxable as if this coin had “earned” money by hanging around being collected. They mostly hang around with a tradeable market value above the nominal value, although certain collectable coin markets might trade somewhat slowly.
What’s to say that the Fed wants to purchase a collectable coin? Maybe they don’t think that this particular coin is good value and there will never be a market to resell it … therefore simply decline to purchase the coin.
Sure … the Fed might accept this coin as a “deposit”, in as much as they are willing to hold it in a box somewhere … but when Treasury tries to draw against that asset the Fed only offers them the opportunity to take back the coin, and does not allow an offset against any account containing FRN’s.
This bit near the end (2:17:55), “Maybe as an Austrian, your preference is liquidate them all … Hoover style”
Gaarhghghghhh!!!!
Bob posed an excellent hypothetical question, what if an alien from Mars came down to Earth and asked, “why do you earthlings employ all these accountants to produce P&L statements instead of just looking at the entire distribution of resources in the economy and figuring out if building a new factory is a good thing”?
Bob’s answer was, “we can’t do such calculations because they are too hard – we don’t have the ability to centrally plan the entire economy.”
I fear that with the rise of AI and computing power, it’s not inconceivable that in the near future we will have the ability to enter trillions of inputs into a central computer and have it compute the most efficient allocation of resources in the entire economy, better than a decentralised system of private actors guided by prices, profits and losses could.
If such an AI system existed, undoubtedly all governments would want to use it to further expand their control of the economy and curtail our freedoms in the name of economic efficiency and “full employment”.
How would we fight against such a system if we lost our main economic argument against centrally planned economies? If the Soviet Union had an AI supercomputer and the Politburo were able to use it to increase their economic output and outperform decentralised Western economies, it would still be around today.
Rohan’s suggestion that a city should be able to deny a construction permit or force a commercial bank to deny a loan to a private company building a casino because the state wants to have resources available to build a state school is truly horrifying.
@Alex K
Dr. Murphy’s reply was off the cuff so I don’t fault him for it (it’s doubtful I would have done better!) though his answer was incorrect. It’s not that the calculations are too hard, it’s that they’re literally impossible. Even with an infinitely powerful AI it would be impossible. The problem of economic calculation cannot be solved by machines because calculation — to serve its purpose — must reflect the trade-offs of all humans in all transactions. The whole point of calculation / prices is to reconcile the preferences of all producers and all consumers, all at once. Doing so requires the knowledge of every producer and every consumer. Unless we’re all hooked up to the Matrix with all of our thoughts being read in real-time there’s no sense in which a machine could do that. And if we’re all contributing our preferences via Matrix uplinks that’s not an AI deciding for us: that’s us making the choice ourselves just like the non-AI case. Any scenario where a government or AI is doing the planning is merely substituting the preferences of all the people for the preferences of the government/AI. It’s removing our preferences and putting someone else’s in there place.
Central planning / AI doesn’t solve the calculation problem, it rejects calculation and imposes the choices of others onto us. The question: “Should we build another factory?” is either answered voluntarily by the choices of individuals (calculation), or it’s imposed by force (no calculation). That’s the two worlds we choose between: choice vs force. A theoretical AI that perfectly reflected all of our choices is by definition the same as us making a choice (if is not, then it doesn’t perfectly reflect our choices and thus is imposing its preferences and not reflecting ours).
Can you guys give me rough time stamps of when we talked about the calculation problem? If you don’t remember. no problem, but I want to review the exchange and I don’t remember when we talked about it.
2:30:00
I’ve done a bit of (panful) reading into the the proponents of more centralized (approaching central) planning, and one thing they hinge on is that even though individuals have have distinct utility functions(if they bother to consider it), you can approximate the utility distribution of the population decently well(like a person offering a product does), and since the price mechanism isn’t perfectly fine tuned for any given consumer, why should they care if they had to overpay for bread vs having variety in their bread entitlements. Also in books like The People’s Republic of Walmart, they “show” how since mega corporations can have large supply chain management we have the capability of central planning and it’s just a matter of nationalizing their technologies and mechanism. I have many thoughts and critiques on this sort of reasoning but I’m curious what other free market people think?
TLDR; how to counter market socialism?
Rohan is undoubtedly very bright and I suspect capable of defending very well any position he holds. But this reminds me of Edward DeBono explaining why very bright people are often terribly unwise. He pointed out that the ability to defend any position and win arguments, leads one to believe that one is always right and thus without the need to change one’s mind, which leads to a lack of wisdom.
For example, almost in the same sentence, he said: “I don’t want the government to read my &*%$# mail” and then: “I don’t like education vouchers, I like public schools”
His personal preferences seem bizarre to me (although he’s welcome to them). I certainly would prefer to be able to send my kids to a school of my choice than not having the government read my mail (not that I’d enjoy that).
Exhausting for the listener.
This was v unsatisfying.
Bob is a very good debater, very sharp, but this was not supposed to be a debate. At the same time Rohan Grey’s ideas are so bogus that it would have been a sin for Bob to just let Grey give a 2 hour class on MMT.
So this was neither a debate nor an interview, it has only shown what sort of tricks Marxists like Grey are capable of.
Wonder if Clort27 is Hans-Hermann Hoppe.
The ideal way to tackle a Marxist performer such as Rohan Grey is to ask him very very simple questions as HHH suggests:
HOW do bureaucrats know what are the “best” plans, and “best” for whom?
WHy doesn’t Bangladesh or Chad issue a trillion dollar coin as a solution to poverty?
In the Casino vs School example, ONLY the private party putting up the money gets to decide what is the better investment.
Bob is such a smart man, almost like EVBB: he has 5 ways to think for every problem. Yet here, he was way too kind to Grey.
I actually like it when Bob has people with vastly different opinions on and just learns from them. Hard to really get a good grasp of what someone believes if you start debating hard out of the gate.
Listened to this last week but was thinking about it and I think Rohan revealed his end game in the part about vouchers. He wants to change the very nature of money. It would no longer be fungible. It will work more like vouchers. Need “money” for education, print some up, need “money” to manufacture guns, well….
The key issue for me about MMT is not the mechanics. You can formulate an MMT model that functions the way they say. You could view the world through that lens. The key problem is that the outcome is that it lays the decision making on the central planning authority explicitly. And sort of deliberately eschews the marketplace. I think MMTers implicitly assume a central planner before they get on board with the theory.
One issue I wish you had pushed Rohan on: They insist that a bond is an asset, just like money. But a bond is also a liability for society. By accounting logic, the future liability of the bond offsets the “savings” increase to the public, right?
In all of your superb commentary on MMT, I still don’t know MMTers would respond to this basic point.
Chris have you seen my article on that type of claim?
Hi, Bob. I re-read your article. Thanks again for your yeoman’s work on this subject.
I agree with your analogy of Tabitha and Sam.
I also agree with your sage wisdom that “you can’t buy groceries with government bonds.”
And yet, MMTers like Grey still insist vehemently that bonds are exactly like cash holdings in an important way. Maybe it is a matter of definitions, as your article suggested.
I wish I knew whether Grey and Kelton are truly ignorant of the difference between cash and bonds, or if they purposefully conflate the terms because it hides the obvious hole in their logic.
It’s amazing how much Rohan Grey’s arguments mirrored Mark DeWeaver’s description of the Soviet monetary system. (His article is on Mises.org)
Grey, like the Soviets, believes there are basically two monetary systems, the financial sector and the real economy. There is a moat between them, and the government/banking cartel can control most of what is able to cross the moat. So the Treasury and Fed can manipulate the financial sector indefinitely without seeing effects in the real economy.
Obviously, this view is erroneous. Government mismanagement can only be hidden for so long before the problems of the financial sector spill over into the real economy. This is what causes the market to bust.
Good discussion of MMT in theory. MMT in practice may not work so well. I am sure they would respond that this is not true MMT.
https://www.bloomberg.com/news/articles/2020-07-23/with-mint-at-100-argentina-imports-bills-to-meet-cash-thirst
I really enjoyed this podcast episode as well. I admit I didn’t fully follow all Rohan’s points – as a layperson a lot of it was over my head. But I could tell he was genuine and wasn’t trying to deceive, and, in my opinion, succeeded in being both an interesting podcast guest, and explained a different worldview than is usually portrayed. I’m sure Bob has a lot to chew on and looking forward to seeing his response. (I’m a few episodes behind at the moment so it’s possible that episode is already released).