An MMT vs Austrian Debate Post-Mortem Part I of V: Preface

By Rohan Grey

[Part I] [Part II] [Part III] [Part IV] [Part V]

[If you are interested only in the substantive analysis of the debate, skip directly to Part II]

On July 4th, the New York Times published a profile written by economics journalist Annie Lowry on former hedge fund manager and maverick economic theorist Warren Mosler. The school of thought Mosler subscribes to, known as “Modern Monetary Theory” or “MMT,” has been covered by a number of journalists (see, e.g. here, here, here, and here). MMT purports to combine insights from a range of historical monetary theorists with an understanding of contemporary monetary operations to construct a progressive meme for money that drastically differs from most standard economics textbooks.

Lowry’s article suffered from a number of factual errors and questionable use of journalistic discretion, prompting an as-of-yet unaddressed request for correction by Mosler and additional rejoinders by other proponents and sympathizers (see, e.g. here, here, here, here and here). On the other hand, Lowry somewhat redeemed herself by, in a rare if not unprecedented act for the Times, supplementing the article on the Times’ Economix Blog with a detailed reading list of Mosler’s own writing.

Among the links provided was a public debate that I helped organize at Columbia Law School between Mosler and and Robert Murphy, a well-known adherent of the Austrian School of Economics. The debate was conceived as part of a new, global student-led learning initiative, the Modern Money Network (or MMN, pronounced like “Mammon”), which seeks to promote a functional, realistic understanding on the legal-economic dynamics that shape money and finance, and to foster a space for the transdisciplinary study of money as a social technology.

As moderator and CNBC NetNet editor John Carney noted at the conclusion of the debate, the event was historically significant as it marked the first highly publicized and in-person clash between the two  schools of thought. Nevertheless, it was panned by some viewers for being too open-ended, too unstructured, and not lively enough.

While there is certainly merit to these critiques (although with regards to the third, I suggest those seeking entertainment next time go for pro-wrestling rather than a debate on macroeconomics), I would argue that the debate nevertheless achieved exactly what it was intended to do.

Why do I think that? Three reasons:

1. Seeing the Forest: A lot of economic discourse between competing schools of thought, both in journals and on blogs, consists of individuals either speaking past each other, at cross purposes, or focusing on minor points of disagreement without explicit acknowledgment of deeper conceptual differences. Not so in this debate. Instead, the (admittedly unsexy) topic and atypically fluid format allowed the speakers to avoid the shallow analysis and petty showmanship that characterizes so many public debates, and zero in on the crux of the theoretical disagreement between their respective schools.

2. Strange Bedfellows: Perhaps surprisingly, the debate revealed a high degree of consensus between two schools of economic thought that many view as sitting on polar opposite ends of the economics spectrum. As explained below, the only major clashes (to the extent they could be called clashes at all) were over questions of political and legal theory, rather than macroeconomics per se. Indeed, I would tentatively suggest that the level of agreement between between the two participants on operational and technical details of the monetary system was greater than either would have been likely to find with any randomly selected member of the mainstream economics profession.

3. Acknowledging All Voices: While MMT and the Austrian School enjoy a growing lay following thanks to the equalizing force of the internet, they are both professionally marginalized and are regularly derided and dismissed by their orthodox brethren. This is ironic, given those same professionals’ collective failure to predict the largest crisis of their generation in any meaningful way, and the fact that, particularly in the case of the Modern Monetary Theorists, those criticized are among the handful of economists that got it right.

By choosing a representative for the Austrian School rather than a more well-known member of the economics profession for our first clash, the debate functioned as an explicit rejection of the view that “There Is No Alternative,” and the only ideas accepted by the mainstream of the profession are worthy of serious engagement. 

But the symbolic implications are deeper than that. As a student learning network – particularly one with progressive leanings – we believe it is crucial to not only promote an understanding of money that is legally and historically consistent, but also to encourage engagement with the ideas of other marginalized groups, even if we may strongly disagree with their beliefs or methodology. 

In politics, there are real, irreversible risks associated with cooperation between opposite sides of the ideological spectrum against the hegemonic center. In education, however, there are few, if any, risks associated with expanding one’s scope of awareness to more properly understand the ideas of those with whom we disagree. In fact, I would go so far as to suggest that, in true Habermasian style, genuine and respectful engagement with all marginalized voices is vital to maintaining the integrity and emancipatory power of free and open discourse.

In keeping with this mission, I have put my debate hat on and, in the spirit of an extension speech in British Parliamentary Style, penned a response designed to summarize and build on the central themes raised during the Mosler-Murphy clash. For the sake of convenience, I have divided my summary into two parts, followed by a constructive extension of Mosler’s position from the perspective of a law student. Any thoughts, comments, or critiques are welcome.

Addendum: while I highly suggest you watch the whole debate, I have made liberal use of what I consider to be the (pardon the pun) money quotes in order to accurately represent various speakers’ positions. I apologize in advance if that is not your preferred mode of communicating. Also, while some quotes have been rearranged for the sake of flow, I have made a good faith attempt to be faithful to their contextual meaning and not misrepresent each speaker’s position. If anyone believes I have failed at this, please let me know and I will make revisions where appropriate.

15 Responses to An MMT vs Austrian Debate Post-Mortem Part I of V: Preface

  1. Gerry Spaulding

    “”on the central themes raised during the Mosler-Murphy clash.””
    LOL
    More of a LOVE-IN.
    Murph pretty much ignored any significant commentary by Mosler, always seeming to be checking his notes and always promising that substantive response on the major issues was coming……… which was never a challenge to anything Warren said and with which Warren pretty much agreed.
    Austrians should get ‘out’ more often.
    The most disarming aspect of the debate was not knowing what they were debating about.
    Next time, start with a clear “GIVEN:” to debate to the end.
    Sorry, it was a sleeper.
    Better left in the can.
    Let’s hope that Rohan can breathe some life into it.

  2. Re #2, I think a lot of that had to do with Murphy’s presence (as opposed to having a more orthodox representative of the Austrian school). A debate with Thomas Woods, for example, would have been a lot more contentious (and pointless), I think.

  3. William Wilson

    Thanks for an apparently well-documented summary for design for the Columbia Law School debate series. As a non-economist, I appreciate several of the reference articles, particularly that by Dirk J Bezemer on June 16, 2009:
    ” No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models”.

    As mentioned by others, the debate between Warren Mosler and Robert Murphy was a disappointment; even though the WM and John Carney tried, Dr Murphy appeared to be either unprepared or unable to understand the intended design/objective of the exercise.

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  5. “While MMT and the Austrian School enjoy a growing lay following thanks to the equalizing force of the internet, they are both professionally marginalized and are regularly derided and dismissed by their orthodox brethren.”

    Is the Austrian school truly marginalized? “Markets Uber Alles” is at the heart of neoliberalism, and you can’t throw a stick nowadays without hitting a libertarian. They like to pretend that they are at the margins, that’s part of their schtick.

  6. I was very disappointed with the 30 minutes or so I listened to. My impression is that Mr. Murphy isn’t familiar with MMT so couldn’t respond to Mr. Mosler’s statements. He also kept saying “Austrians believe” as if his own opinions were different. All in all, it doesn’t seem worth listening to the rest as it doesn’t really contrast the positions of the two schools.

  7. Posted this on Murphy’s blog, figured I’d post here too:

    “> Murphy’s non-response to Mosler’s claim that “the natural rate of interest on a floating fiat currency is zero” was, in my opinion, an implicit concession that the conventional Austrian Business Cycle narrative of government interference with otherwise “natural” interest rates is largely inapplicable to the current U.S. monetary system.”

    Maybe he doesn’t feel that Murphy adequately responded to that position, but it doesn’t mean the position is sound. This position can be debunked by reference to arbitrage, no Austrian analysis required.

    If in a system of floating exchange rates a central bank engages in inflationary money printing, there’s two possibilities: the currency can remain in the local economy and devalue it relative to local goods and services (inflation), or it can be exchanged with foreign countries and devalue the currency relative to other currencies (which aligns with Mosler’s claim). But it isn’t an either-or proposition; what happens is a combination of the two, because if it didn’t there’d be arbitrage opportunities. A positive increased local interest rate would necessarily occur even in the absense of all other government interventionism, therefore the Austrian critique is relevant.

    And even if you don’t acknowledge that point, you can still perform an Austrian analysis of the situation through reference to some classic Monetarist theory:

    Again, assume that all the newly-created monetary base goes straight out of the country and into the hands of foreign investors and traders out of some kind of magical process, leading to a decrease in the value of the dollar relative to other currencies. A decrease in the value of the currency increases supply for exports and decreases supply for imports. Since there is no corresponding change in demand for imports (all else being equal, saving patterns haven’t changed, nor did consumption patterns; remember, as if by magic, this currency never touched the American economy), a shortage of local goods develops and prices for goods formerly imported now rise; the demand must be met either locally or with the now pricier foreign goods. In a sufficiently complex market, this ripples through the prices of everything else as the economy is forced to adjusted to the new costs of various goods and services. A new equilibrium price and quantity for goods in the economy is created. Viola; a systemic devaluing of the local currency in relation to local goods and services, therefore there is a positive riskless interest rate in the long-term. The Austrian critique (that the stickiness of input prices on producers causes malinvestment during the pre-inflationary period that inevitably leads to a bust when prices correct themselves) is therefore relevant.

    This is exactly what is occuring in the U.S. right now and explains why inflation is less than the traditional Austrians expect but their claims of distortions are still relevant. There’s just as much distortion in the economy as in the traditional Austrian critique, just that part of it comes from interest rates and a (much larger) part of it comes from exchange rates thanks to the artificially high (that’s a post for another day) foreign demand for USD.

    The naked assertion that the “natural interest rate” as conceived by Austrians is zero under floating exchange rates is patently absurd. In terms of their effects on local interest rates, foreign demand and local demand compete and have opposite effects; unless local demand is zero, the “natural” interest rate will be positive.

    • Both the interbank rate and the rate on gov debt are created by government intervention.
      Government intervention is involved to create USD without which there can be no interest rates denominated USD, no USD interbank rate, no USD government debt, interest bearing or not.

      No country that issues its own floating currency & denominates all its debts in that currency is required to issue interest bearing debt. Any such issuance is voluntary, set by fiat.

      As the government intervenes equally in the interbank market when it supplies reserves as when it drains them, for the USD interbank rate to exist, it is not even possible for the government not to intervene. It can only be set by government intervention, ie: by fiat.

      Austrians are confused about interest rates.

    • “If in a system of floating exchange rates a central bank engages in inflationary money printing, there’s two possibilities: the currency can remain in the local economy and devalue it relative to local goods and services (inflation), or it can be exchanged with foreign countries and devalue the currency relative to other currencies (which aligns with Mosler’s claim). ”

      Even in a static economy, much less the dynamic ones of reality, an increase in the money supply does NOT necessitate either inflation or currency devaluation.
      This claim has been refuted by the empirical evidence.
      It also ignores the existence of US Dollar Hegemony and the benefits it grants to the US.

      In general, it is only when the economy has reached full-employment & full capacity utilization that additional government deficit spending is likely to cause inflation.

      But even if your assertion was true, should not the fact that more than 90% of money supply is comprised of bank credit shift the focus off government spending and onto bank credit creation as the cause of inflation?
      The fact that banks only lend against existing assets, 70%+ of bank loans being mortgage loans on existing buildings, only strengthens the case for bank credit as the cause of asset price inflation and explains how asset price inflation can occur in absence of commodity price inflation.

      How else can the economy gain USD except by “inflationary money printing”

  8. Hi Djinni,

    Thanks for the comment.

    First, i think you’ve got this confused:

    “If in a system of floating exchange rates a central bank engages in inflationary money printing, there’s two possibilities: the currency can remain in the local economy and devalue it relative to local goods and services (inflation), or it can be exchanged with foreign countries and devalue the currency relative to other currencies (which aligns with Mosler’s claim).”

    The currency wouldn’t remain in the local economy, it would remain in the federal reserve system as excess reserves, which is what drives down the FFR to zero. Your language implies that banks lend out reserves in an inflationary way, but the only impact of CB “money printing”, or QE, is that the interest rate falls. Devaluation/inflation is by no means guaranteed, even if the lower interest rate has a lending effect.

    I’m also not sure what you mean by “arbitrage” opportunity in relation to local goods and services, but there would be an arbitrage opportunity w/r/t bonds and reserves.

    Second, I agree with you that there can be an import/export effect of central bank reserve creation, but i don’t think the assumption there wouldn’t be a corresponding change in demand for imports when fx rates change is warranted. Moreover, at best, all you’ve proved here is that there is a positive real rate – Mosler was explicitly talking about the nominal rate.

    Third, I’m not sure what you think the “natural” exchange rate would be if i weren’t “artificially high”, but it seems you have included a variety of different things under your definition of the natural rate, which is why there is confusion that wasn’t apparent in the debate itself.

    R

  9. Thanks for your response.

    “The currency wouldn’t remain in the local economy, it would remain in the federal reserve system as excess reserves, which is what drives down the FFR to zero. Your language implies that banks lend out reserves in an inflationary way, but the only impact of CB “money printing”, or QE, is that the interest rate falls. Devaluation/inflation is by no means guaranteed, even if the lower interest rate has a lending effect.”

    I was simplifying. I was speaking more generally as to the effects of “deficit spending”, but it applies also specifically to QE and dropping the FFR. An increased supply of reserves drives the price (interest rate) of loanable funds down and increases the aggregate quantity of funds loaned (basic supply vs demand); the exact relationship depends on the slope of the supply and demand graphs, and I haven’t heard anyone claim that the demand for money is vertical. Then, an increase in the aggregate of loaned funds increases the supply of money due to the effects of fractional reserves.

    “I’m also not sure what you mean by “arbitrage” opportunity in relation to local goods and services, but there would be an arbitrage opportunity w/r/t bonds and reserves.”

    Any disequilibrium in prices is open to arbitrage, although businesses and consumers taking advantage of a disequilibrium in prices (if not necessarily reselling the item for a profit like ordinary arbitrage suggests) is something I (and many others I know) consider arbitrage, as it has the tendency to move the economy towards the equilibrium price just like real arbitrage. The potential is there for people to arbitrage, even if people don’t necessarily take advantage of it using arbitrage in most circumstances (e.g. consumers bargain hunt and companies compete to lower costs => drives prices down, for example). It’s just a natural progression of the definition of arbitrage to include such behavior.

    “Second, I agree with you that there can be an import/export effect of central bank reserve creation, but i don’t think the assumption there wouldn’t be a corresponding change in demand for imports when fx rates change is warranted.”

    Sorry, I meant that the demand curve wouldn’t necessarily shift as a direct result from an increased money supply or a decreased exchange rate. Aggregate demand would necessarily change in the long-term, which is a significant factor in the ABCT critique.

    “Moreover, at best, all you’ve proved here is that there is a positive real rate – Mosler was explicitly talking about the nominal rate.”

    Sorry, I misunderstood his position then, because you framed it as a critique of the Austrian Business Cycle Theory.

    If he was talking about the nominal rate, then he was talking past the Austrian position. Austrians argue for positive nominal rates due to time preference, but that doesn’t have anything to do with the Austrian argument against inflationary expansions of the money supply, which is strictly how temporary distortions in real interest rates (and, for completion’s sake, I’ll throw in exchange rates) distort the economy to create an artificial boom. The Austrian critique applies regardless of the “true” nominal rate. When you called it a critique, and when I read his position, I understood it to mean that the entire inflationary effects of increasing the money supply would be captured by changes in the exchange rate and there would be no corresponding affect on interest rates.

    “Third, I’m not sure what you think the “natural” exchange rate would be if i weren’t “artificially high”, [...]”

    If the demand for USD wasn’t artificially high, the U.S. literally would probably collapse overnight. The economy is a still a net importer of consumption goods and the center of world investment because its exchange rate is so high. Ending the artificial controls inflating that would cause another global depression as the U.S. is forced to transition towards higher exports and the rest of the world is forced to transition towards higher imports.

    As to where the exchange rate would be and where the demand comes from, one need not look to anything else but the fact that the Saudis specifically, and OPEC in general, trades exclusively in USD for Oil thanks to our buddy Nixon. And the fact that the U.S. military seems to get quite involved in OPEC countries (or the allies of said countries) that at one point or another have expressed wishes or made attempts to sell oil in other currencies… and, let’s not forget all the talks or actual acts of intervention in non-allied, non-OPEC countries.

    The exchange rate could likely be estimated by comparing changes in oil prices as a result of shocks to changes in the U.S. exchange rate during that same time period. Last I checked, they were pretty closely linked.

  10. Hi Djinni,

    I agree with you that the idea of a “natural rate” in a policy context is debatable – I think Warren uses it deliberately in a way to suggest that absent a good reason for a policymaker to create a positive interest rate, the default way of think should be just to stay out of active manipulation. If that were the case, and bond operations ceased because they weren’t necessary, while everything else kept going as normal (spending, taxation, bank reserve requirements, etc), then you would have a situation where the interest rate would fall to zero in the long term as the banking systme became flush with reserves. Isn’t that right? So yes, to the extent there isn’t any single “natural rate”, I agree with you. But i don’t think that’s how Warren is using it here – he would be the first to tell you (and did multiple times in the debate) that the rate is a policy variable. What he is effectively saying is “if you pressed me to use your misleading language rather than more accurate language, this is how i would describe it under your model”. At least, that’s how I interpreted him, anyway.

    Re: Arbitrage – thank you for clarifying, and i understand now that you were taking an evolutionary approach towards arbitrage (which when you get that far, is really just marginal analysis, absent initial assumptions about the operating system, no?). I get where you are coming from with this: ” The potential is there for people to arbitrage, even if people don’t necessarily take advantage of it using arbitrage in most circumstances (e.g. consumers bargain hunt and companies compete to lower costs => drives prices down, for example)”, but I think i see the difference between the arbitrage in the bond market, which is essentially a closed system (with one deeply uncertain variable, the politics, as Warren says), while other financial and real markets are open and hence have information access problems.

    With regards to fx, I’m not sure about “Aggregate demand would necessarily change in the long-term, which is a significant factor in the ABCT critique.” – doesn’t this assume that the other international fx players are neutral to the changes in your economy? If other states have an incentive to keep their currency convertibility within a certain rate-range, couldn’t that exert a potentially neutralizing effect on any long-term change pressure that might be exerted?

    “Sorry, I misunderstood his position then, because you framed it as a critique of the Austrian Business Cycle Theory.” – Did i do that? I believe this is the relevant section of what I wrote:

    “Murphy’s non-response to Mosler’s claim that “the natural rate of interest on a floating fiat currency is zero” was, in my opinion, an implicit concession that the conventional Austrian Business Cycle narrative of government interference with otherwise “natural” interest rates is largely inapplicable to the current U.S. monetary system.”

    If Austrians are talking about real not nominal rates, then Murphy’s claim that the Fed was “manipulating interest rates” had nothing to do with the actual interest rates they manipulated, no? When he started by saying interest rates were artificially low, that must mean he wasn’t talking about interest rates on bonds, or reserves, he was talking about interest rates on… what? As far as I can tell, all interest rates are rates on money, which is a nominal variable, so they are all nominal rates. If one were trying to work out what the *real* interest rate was, it would be nominal + inflation. But inflation is a fiscal variable, dependent on how much money is introduced into the system. How can there be a “natural” rate of inflation? Is there a “natural” rate of fiscal policy?

  11. Second part:

    This is very interesting to me: “Austrians argue for positive nominal rates due to time preference, but that doesn’t have anything to do with the Austrian argument against inflationary expansions of the money supply”.

    Surely the argument for time preference is an argument based on an implicit assumption of absolute scarcity. Where is the room for the potential of increasing-returns-on-humanity? Assuming a more effectively designed monetary system can increase the return on coordination, couldn’t the aggregate productivity benefit of that increase be sufficient to cancel out any time-preference distortions of a zero rate? I acknowledge that’s a political/experimental question, but I don’t see Austrians discussing the fact that when you have some non-scarce goods (human coordination, human brain potential, the internet), they provide a counternarrative to the time-preference argument for a positive interest rate. Moreover, even if that were the case, the state is arguable the only entity with a (nominal) time horizon of infinity, so why wouldn’t its time preference on holding assets be zero? I can see the argument for a positive rate of interest on private access to liquidity, but not on government access to liquidity. The latter argument can only come from the Austrian argument against inflationary expansions of the money supply, which is why I don’t think you can separate the two out in policy the way you have in theory (although it’s very clarifying for me that you did, so thank you very much).

    “When you called it a critique, and when I read his position, I understood it to mean that the entire inflationary effects of increasing the money supply would be captured by changes in the exchange rate and there would be no corresponding affect on interest rates.”

    This is very helpful to me, and certainly a more accurate way of explaining Mosler’s position in relation to your own, but not, I think, in relation to the way Murphy characterized the “Austrian” story about recent economic events and the role of Fed interest rates being artificially low. He did not mention exchange rates, or imports/exports being a major issue, as far as I could tell (please correct me if i’m wrong). And with regards to your point, I think Mosler said at the outset he was assuming a floating exchange rate system, and Murphy never once criticized that position, so if the Austrian position is that putting all of the inflationary (which, I assume you mean “money-supply-expanding effects” in the Austrian definition of the term, since fx devaluation doesn’t necessary have a purchasing power effect on each dollar of currency and hence isn’t really “inflation”) impact of government deficits on the exchange rate is a bad idea, I can see that concern and think that’s a very interesting debate to have. We touched on it briefly in our fourth Modern Money and Public Purpose seminar last year, but I think we probably need to have an entire event devoted to the politics and policy of floating exchange systems.

    “If the demand for USD wasn’t artificially high, the U.S. literally would probably collapse overnight. The economy is a still a net importer of consumption goods and the center of world investment because its exchange rate is so high. Ending the artificial controls inflating that would cause another global depression as the U.S. is forced to transition towards higher exports and the rest of the world is forced to transition towards higher imports.”

    But global markets are affected by geopolitical considerations, so how can you be sure that it is “artificially” high, rather than simply an accurate reflection of the value of the US army as imbued into the dollar? This is what Michael Hudson and David Graeber argue, for example, and as a former international relations student, makes sense on the basis of that understanding. It seems you agree with me when you talk about OPEC, but i’m curious why you accept this:

    “The exchange rate could likely be estimated by comparing changes in oil prices as a result of shocks to changes in the U.S. exchange rate during that same time period.”

    As the inevitable conclusion – why should the US succumb its sovereignty to Saudi Oil price-setting practices? It seems to me that accepting the current correlation between oil prices and currency on the supply side is committing one’s self to the inevitability of the status quo, whereas if you acknowledge the potential for demand-side change (through investment, public or private), then you can maintain currency sovereignty and try to reduce the very real correlation you mentioned.

    • “I agree with you that the idea of a “natural rate” in a policy context is debatable – I think Warren uses it deliberately in a way to suggest that absent a good reason for a policymaker to create a positive interest rate, the default way of think should be just to stay out of active manipulation.”

      I agree, with the corollary that I’ve also yet to hear of a good reason.

      “If that were the case, and bond operations ceased because they weren’t necessary, while everything else kept going as normal (spending, taxation, bank reserve requirements, etc), then you would have a situation where the interest rate would fall to zero in the long term as the banking systme became flush with reserves. Isn’t that right?”

      If the government ceased all loan and bond operations, that wouldn’t necessarily mean all interest rates would be zero. Banks still offer interest rates on savings and demand interest on loans above and beyond prime + inflation. Companies would still offer positive bond coupons. Therefore, if you wanted to borrow funds for some investment venture, you would still see a positive real rate. I guess if, when you say “the” interest rate would be zero, you mean the rate on government bonds, then that’s true.

      “So yes, to the extent there isn’t any single “natural rate”, I agree with you. But i don’t think that’s how Warren is using it here – he would be the first to tell you (and did multiple times in the debate) that the rate is a policy variable.”

      Well, when borrowing is a government policy, then it’s true that the rate at which government borrows is technically a policy variable. But I don’t think we agree on what policies a government could realistically implement through the adjustment of said interest rate.

      “Re: Arbitrage – thank you for clarifying”

      No problem, sorry about the confusion.

      “I think I see the difference between the arbitrage in the bond market, which is essentially a closed system (with one deeply uncertain variable, the politics, as Warren says), while other financial and real markets are open and hence have information access problems.”

      The bond market is more than just government bonds, though. So is the market for debt in general. When a business looks at how to finance an expansion, it has to choose between debt & equity, in a sense, and has to choose where to actually perform this expansion. When the government decreases interest rates, it’s making debt in its country appear cheaper than it really will be in the medium and long run. The long-run implications on prices and exchange rates necessarily wipe out and reverse any perceived gains thanks to arbitrage, but for the time being, malinvestment occurs.

      “If other states have an incentive to keep their currency convertibility within a certain rate-range, couldn’t that exert a potentially neutralizing effect on any long-term change pressure that might be exerted?”

      Sorry if I’m misunderstanding, but do you mean pegging their currency to the USD? Certainly they would absorb some or all of the negative repercussions that should be experienced by the US, but that’s why nobody pegs their currencies to USD anymore; they all jumped off of pegging when the U.S.’s inflationary policies screwed them over by forcing them to hyperinflate to stabilize the exchange rate.

      “Did i do that? I believe this is the relevant section of what I wrote:
      Murphy’s non-response to Mosler’s claim that ‘the natural rate of interest on a floating fiat currency is zero’ was, in my opinion, an implicit concession that the conventional Austrian Business Cycle narrative of government interference with otherwise “natural” interest rates is largely inapplicable to the current U.S. monetary system.”

      That sounds like a critique to me. Calling it inapplicable is another way of saying useless. Again, correct me if I’m misunderstanding you.

      “If Austrians are talking about real not nominal rates, then Murphy’s claim that the Fed was “manipulating interest rates” had nothing to do with the actual interest rates they manipulated, no?”

      When the fed changes the prime rate on FRNs & its bond rates, it creates temporary distortions in the real interest rate of various business ventures, and medium term changes in exchange rates and prices in general, which creates long term malinvestment.

      The prime rate on FRNs must closely follow the rate on treasury bonds, or you’re just letting the banks arbitrage the two and make hand over fist for free at the taxpayers’ expense. Not surprisingly, they did a lot of that during QE.

      “When he started by saying interest rates were artificially low, that must mean he wasn’t talking about interest rates on bonds, or reserves, he was talking about interest rates on… what? As far as I can tell, all interest rates are rates on money, which is a nominal variable, so they are all nominal rates.”

      When the government turns around and guarantees, through the power of its printing press and its ability to tax, a specific rate on debt, then that rate becomes the riskless rate that every other investment is compared to. What also happens is that the real return one receives from a venture inevitably ends up being literally discounted post facto compared to the original estimate by the riskless rate due to changes in local prices and exchange rates since the estimate was performed.

      Decreasing this rate later does the same thing, and forces the economy to readjust.

      “If one were trying to work out what the *real* interest rate was, it would be nominal + inflation.”

      The real interest rate would be the price at which those with high time preference (prefer dollars now much more than dollars later) would be willing to pay to those with low time preference (prefer dollars now only slightly more than dollars later). Industries with higher profitability and lower risk can pay more in interest, and so have higher time preferences. Similarly, consumers who wanted money now (e.g. to pay hospital bills) could borrow from those who would prefer having extra later (e.g. they’re healthy and want to save for a rainy day). You could add to this inflation, if any, and if the Fed set a riskless rate then you bundle that in there too.

      “Surely the argument for time preference is an argument based on an implicit assumption of absolute scarcity.”

      Any scarcity at all necessitates time preferences. If you could get something at literally no effort or cost to yourself (i.e. it’s a non-scarce good), you’d already have as much as you wanted. Once it takes some amount of time or money, you run into disparate time preferences: even under the assumption that two people face equal opportunity costs and equal benefits, some people may be willing to wait the necessary time while others may not.

      Once you have disparate time preference, then loans create wealth by transferring capital to when people want them most (i.e. now vs later).

      “Where is the room for the potential of increasing-returns-on-humanity? Assuming a more effectively designed monetary system can increase the return on coordination, couldn’t the aggregate productivity benefit of that increase be sufficient to cancel out any time-preference distortions of a zero rate?”

      Potentially, but Austrians debate about effective methods of improving the monetary and market system all the time; I don’t find that it’s typically neglected.

      “I don’t see Austrians discussing the fact that when you have some non-scarce goods (human coordination, human brain potential, the internet), they provide a counternarrative to the time-preference argument for a positive interest rate.”

      Not sure how those are non-scarce goods. Coordination is a networking effect, and increases as the size of the network increases. Humans and the time they spend coordinating are scarce resources, so time preference is in full effect.

      Human brain potential is not really a good in the same way that technological advancement is not really a good: you need to develop it before it can be used, and that costs time/money. Therefore, it’s a scarce resource.

      The internet requires labor to develop and expand, and therefore is scarce as well.

      Perhaps you could reword your point; I get the feeling I’m missing it.

      “Moreover, even if that were the case, the state is arguable the only entity with a (nominal) time horizon of infinity, so why wouldn’t its time preference on holding assets be zero?”

      The state isn’t an entity. If the actors that comprise the state consider it to have a zero time preference, and lend/borrow money on that assumption, they’re effectively imposing that time preference on the rest of the economy. If the Fed loans at a zero rate (seeing as they’re indifferent between money now and money later) they need to hike taxes or print money. The Treasury can’t borrow at a zero rate unless everyone else has the same time preferences as them or they force everyone to loan to them at a zero rate.

      “I can see the argument for a positive rate of interest on private access to liquidity, but not on government access to liquidity.”

      Government access to liquidity in real terms can’t be zero if private access to liquidity isn’t either. They either need to “borrow” it from the Federal Reserve, or borrow it from the private sector at a positive rate.
      In the case where they “borrow” from the Federal Reserve, what they’re doing is ultimately money printing, since the Fed just prints the stuff, and just remits its profits on the interest after expenses to the Treasury anyway.

      “The latter argument can only come from the Austrian argument against inflationary expansions of the money supply, which is why I don’t think you can separate the two out in policy the way you have in theory”

      I’m just making the classical distinction between Taxation, Debt, and Inflation: a government can print, tax, or borrow the money it wants to spend. The distinction in practice is that there isn’t really one: all three rob the private sector; it’s just that Taxation is a little more obvious and honest, whereas debt robs those who can’t vote yet and inflation robs those with the least and last access to the new money.

      “This is very helpful to me, and certainly a more accurate way of explaining Mosler’s position in relation to your own, but not, I think, in relation to the way Murphy characterized the “Austrian” story about recent economic events and the role of Fed interest rates being artificially low. He did not mention exchange rates, or imports/exports being a major issue, as far as I could tell (please correct me if i’m wrong).”

      I would argue that both Murphy and Mosler were talking past each other; perhaps Murphy didn’t see the relevance of exchange rates or didn’t feel it affected his point in a substantial manner. I did initially admit Murphy didn’t exactly make his case very strongly.

      “If the Austrian position is that putting all of the inflationary impact of government deficits on the exchange rate is a bad idea, I can see that concern and think that’s a very interesting debate to have.”

      Well, it’s certainly a bad idea, but a positivist Austrian would argue that the money-supply inflation impacts of government deficits are a bad idea whether they hit exchange rates or interest rates. Hitting either spurs malinvestment and disequilibrium.

      “But global markets are affected by geopolitical considerations, so how can you be sure that it is “artificially” high, rather than simply an accurate reflection of the value of the US army as imbued into the dollar?”

      If you want to claim that geopolitical considerations are inherent to markets, then that’s one argument you can make. I view politics as exogenous to the market, and market states that depend on geopolitical factors as artificially supported. Politics is a whole different way of interacting with people than the marketplace, and political considerations rarely coincide with that of the actors in a marketplace. In fact, I would say that markets and politics are a dichotomy in terms of solving social and economic problems.

      “As the inevitable conclusion – why should the US succumb its sovereignty to Saudi Oil price-setting practices?”

      I meant that if one desired to estimate the exchange rate if the geopolitical considerations were removed, you could start by trying to isolate how changes the price of oil in USD affects the exchange rate of USD. I wasn’t suggesting for investors to peg their expectations of the value of USD to its price in oil always and forever; I was just observing that, for now at least, investors seem to be doing so for the time being.

  12. Hi Djinni, thanks for the deep and constructive response.

    “I guess if, when you say “the” interest rate would be zero, you mean the rate on government bonds, then that’s true”
    – I believe Warren is referring to “the” interest rate like the textbooks say, which is the cost of reserves. in a world without bonds, there wouldn’t be a rate on bonds, just the monetary policy rate.

    “But I don’t think we agree on what policies a government could realistically implement through the adjustment of said interest rate.”
    – fair enough!

    “The bond market is more than just government bonds, though.”
    – is this the case for banks operating within the reserve system that need bonds to coordinate with the Fed on monitor policy with repos, etc?

    “When the government decreases interest rates, it’s making debt in its country appear cheaper than it really will be in the medium and long run. The long-run implications on prices and exchange rates necessarily wipe out and reverse any perceived gains thanks to arbitrage, but for the time being, malinvestment occurs.”
    – How can you be so certain of your interpretation of the effect on prices and exchange rates? If the rate is a policy variable, then why is the current rate so much less prone to malinvestment than a lower rate? What if the current rate is promoting malinvestment by having rates too high?

    “Sorry if I’m misunderstanding, but do you mean pegging their currency to the USD?”
    -No, I mean if the bottom fell out of the US dollar, then exports would become very competitive, which would mean other countries would other be more likely to buy them (at a cost to their local producers) or would be encouraged to engage in similar currency devaluation to preserve a stable balance of trade.

    “That sounds like a critique to me. Calling it inapplicable is another way of saying useless. Again, correct me if I’m misunderstanding you.”
    – No – as Warren said, if we went back to a gold standard, perhaps it would be entirely applicable again. However it does not make sense, in my opinion, to have a narrative of the recent crisis that relies on government interference in the interest rate (which is how Murphy began his opening address), when all interest rates are government interference in a floating fx/fiat regime. If Murphy’s opening address was talking about a recession in a different time period, it could have been accurate.

    “The prime rate on FRNs must closely follow the rate on treasury bonds, or you’re just letting the banks arbitrage the two and make hand over fist for free at the taxpayers’ expense. Not surprisingly, they did a lot of that during QE.”
    – why not have it the other way around, and make the rate on T bonds follow the rate on FRNs? It seems to me this is more consistent with the history of T bond auctions prior to the 1951 Accord, and makes more sense than letting the bond vigilantes pretend to be driving rates when they don’t.

    “Decreasing this rate later does the same thing, and forces the economy to readjust.”
    – fair enough – i don’t think that is “artificially” low. The government makes no promise as to the real purchasing power of its debt, as far as i know. Isn’t that why there is distinction between TIPS and regular treasuries?

    “The real interest rate would be the price at which those with high time preference (prefer dollars now much more than dollars later) would be willing to pay to those with low time preference (prefer dollars now only slightly more than dollars later)”
    – that assumes a static supply of money, right? What is the time preference of the state?

    “Any scarcity at all necessitates time preferences.”
    – No, because you can have transformation between different goods. So if there is something like, say digital goods with zero marginal cost of reproduction, and something like information in a book, then an investment that transfers the information into the book into a digital good would be an active reduction of scarcity, even though you couldn’t do it at the outset. And in that context, i ask again, what is the government’s time preference on its printing press?

    “Once you have disparate time preference, then loans create wealth by transferring capital to when people want them most (i.e. now vs later).”
    – that’s only transferring existing capital. What about creation of new capital? I don’t think you can separate the role of currency creation and injection from the loan-creation process.

    “Potentially, but Austrians debate about effective methods of improving the monetary and market system all the time; I don’t find that it’s typically neglected.”
    – Has any you’ve read discussed the question I’ve just asked? Because that appear to be to be the implicit assumption by those who promote a fiat currency over purely free banking, i.e. that the return on coordinating the entire economy (which is kinda necessary due to property titles) in the long run creates more wealth than it loses by abandoning hard currency.

    “Coordination is a networking effect, and increases as the size of the network increases. Humans and the time they spend coordinating are scarce resources, so time preference is in full effect.”
    – It is also a design and network-resistance issue. Remove resistance (say, by replacing unnecessarily fragmentary competition with cooperation) and improve design and you increase return on coordination.

    “you need to develop it before it can be used, and that costs time/money. Therefore, it’s a scarce resource”
    – I think you are confusing human brain potential and human brain output. Human brain potential exists from birth – the “means of intellectual production” are all there. There is no direct relationship between time/money and brain potential, only between time/money and brain output. So i agree that there is a scarcity when it comes to investing in getting certain outputs, but the raw material of human potential is infinite, so the more we emphasize that vis-a-vis other methods of production, the more we reduce aggregate scarcity (even if the nutrients each brain consumes and electricity powering the internet from which each brain learns is scarce)

    “The internet requires labor to develop and expand, and therefore is scarce as well”
    – the internet “infrastructure” is scarce. The internet itself isn’t -that is, the act of instantaneous-global-human-communication-of-information-at-zero-marginal-cost-per-bitstream.

    “The state isn’t an entity. If the actors that comprise the state consider it to have a zero time preference, and lend/borrow money on that assumption, they’re effectively imposing that time preference on the rest of the economy”
    – The “economy” in the way you are referring to it is a creation of the state. There is no property right enforcement without a state entity, so there is no issue of time preference because I can simply take something from you and you have no greater claim to legitimate ownership than I do.

    “If the Fed loans at a zero rate (seeing as they’re indifferent between money now and money later) they need to hike taxes or print money. The Treasury can’t borrow at a zero rate unless everyone else has the same time preferences as them or they force everyone to loan to them at a zero rate”
    – so they print money. As long as that doesn’t cause inflation, that doesn’t harm anyone. I don’t think your later conflation of “Taxation, debt and inflation” with “print, tax or borrow” is accurate. Printing is not definitionally inflation. It *can* cause inflation. But it is not inflation. It is printing.

    “Government access to liquidity in real terms can’t be zero if private access to liquidity isn’t either”
    – yes it can if its the monopolist. The Federal Reserve is a part of government, as you point out re: remitting profits. So when the currency unit is nominal and fiat, the liquidity access to govt is zero.

    “If you want to claim that geopolitical considerations are inherent to markets, then that’s one argument you can make. I view politics as exogenous to the market, and market states that depend on geopolitical factors as artificially supported.”
    – how can that be the case when the property rights that undergird markets are imposed on individuals through threat of coercion? As the Russel story goes, it’s geopolitical turtles all the way down. Perhaps you could read the fourth part of my essay and respond to that if you think it’s possible to separate the economics and the politics? I think the dichotomy that you see existing is completely fictitious (as Karl Polanyi argued) once you look at the law underneath it all.

    “I meant that if one desired to estimate the exchange rate if the geopolitical considerations were removed,”
    – how is it possible to ever do that? It’s like asking someone to calculate an interpersonal relationship if the emotions were removed. The states that participate in the forex world are states who do a number of different IR functions on a day to day basis. They can’t put their economics hat on on monday, their politics had on on tuesday, their military hat on on wednesday, etc. It just doesn’t work that way.