By Rohan Grey
[Part I] [Part II] [Part III] [Part IV] [Part V]
As will be clear to anyone who watches the entire thing, there was very little clash by the end of the debate on the operational mechanics of the modern monetary system:
Murphy: In particular, what makes the Austrians different from other schools of thought, even other nominally free market schools like the Chicago economists – Milton Friedman, guys like that – the Austrians have a very particular view of what interest rates do.
So the Austrians say “look, the interest rate is a price, and in that respect it is like any other price – it communicates information about the real world. It’s not an arbitrary number – it really means something – and if the market interest rate is supposed to be 7 percent and the Federal Reserve makes it 0.25 percent, that’s going to screw things up.
. . .
Murphy: . . . Suppose it’s true that Greenspan didn’t do the economy any favors, he didn’t give us a soft landing [by cutting interest rates] . . . what if that’s not true? What if all that did was postpone the necessary adjustments in real resources, and then the crisis that hit ultimately in 2008, that was far worse than what would have happened in the early 2000’s. . . .
So what the Austrians say is what Bernanke has done makes what Greenspan did look like child’s play. Bernanke has pumped in more money than all previous Fed Chairs, times two. Instead of bringing interest rates down to 1% and holding them there for a year, which is what Greenspan did, Bernanke brought them down to basically zero, held them there for several years, and is promising to do it indefinitely until it finally starts working.
So if you think interest rates serve some sort of function, if you think they communicate information and that pushing them down messes things up, then what Bernanke is doing is really bad. And so a lot of Austrians think “yeah, it spared us the immediate crisis that would have happened in late 2008/first half of 2009, had the government just stood back and let things unravel, but it’s not sparing us the agony. It’s just postponing it.”
So we don’t know when it’s going to hit, but at some point there is going to be a reckoning, because you don’t cause genuine prosperity by printing money and giving it to rich investment bankers who made bad investment decisions, which is what Bernanke has been doing.
. . .
Mosler: Let’s talk about interest rates. Let’s just back up to the word “interest rate.” What MMT recognizes is that interest rates mean two different things, depending on whether you’re on a fixed exchange rate policy or a floating exchange rate policy.
. . . Any foreign exchange trader – and correct me if i’m wrong – will tell you that if you go out and short forwards in the Hong Kong dollar, interest rates go up. But if you go out and short forwards in the Japanese Yen like they just did, the Yen goes down and short-term interest rates stay exactly the same.
We’ve got two entirely different things going on in the monetary system when you have a fixed exchange rate policy versus a floating exchange rate policy.
So what i’d like to say is that what Dr. Murphy is describing is arguably valid in a fixed exchange policy, which would be a gold standard, or something like the Hong Kong Dollar, or the Argentinian Peso when it was fixed to the dollar. And in fact, if you look at the original authors of Austrian economics, they were all in the general context of fixed exchange rates. Not that they always believed in them or prescribed them, but that was the general context of what was happening and that best described what was happening at that time.
Today we’re in a whole different context. We’re in the context of floating exchange rates, and it’s entirely different.
. . .
Murphy: Let me just wrap up the policy conclusions from the Austrian perspective . . . the Austrian recommendation is to say “let market prices do their job. If the Fed has, in fact, encouraged an unsustainable boom by having artificially low interest rates, then the worst thing in the world is to push interest rates way down again and think ‘oh we’re going to have to deal with that and have a soft landing’ – you’re just setting yourselves up for another boom and bust. And so the Fed shouldn’t do so-called expansionary policy.”
. . .
Mosler: I think we’re both driven by the same thing, and I’m looking at it from a floating exchange rate, non-convertible currency context, you’re looking at it from a fixed exchange rate context. I would never say that in a fixed exchange rate, but I would in a floating, and here’s why. What is government interference in the interest rate market? It takes two forms.
It takes the form of the treasury issuing securities, and the Fed paying interest on reserves. If the Treasury does not issue securities, which is an interference in the interest rate, and if the Fed does not pay interest on reserves, then you have a zero interest rate.
So the zero interest rate is the condition in a floating exchange rate market of no government interference. Government interferes to push rates up above zero. So if rates are at four, it’s because the government pushed them to four. If they are at six, it’s because the government pushed them. It’s not because there is some natural rate of six. That would be in a fixed exchange rates. You will have that natural rate, because you have competition.
Carney: So do we have no natural rate right now?
Mosler: It’s zero.
. . .
Carney: This question is for Bob. The Austrian Business Cycle insists that capitalists are mislead by artificially low interest rates into misallocating capital. But given what we’ve sort of agreed upon about how our current system works, shouldn’t that be dead? Meaning, why would any rational businessman look at an interest rate set by the Federal Reserve and think that is indicative of the savings of the American people, or the amount of some commodity being stored up, when we know that’s not true?
Murphy: Sure. So what John is talking about is in the classical expositions of canonical Austrian Business Cycle theory, the language that guys like Mises and Hayek would use is that “when the government or the banks create credit artificially and push down interest rates, that gives the illusion that there has been more genuine saving than there really has. So that there’s more capital goods than are really available, thus the unsustainable boom starts.”
And he’s right – they do make it sound like the businessmen are fooled. And I think strictly speaking that’s not necessary to the theory – it’s the fact that prices do work, and there are incentives, and if you lower the price, that’s going to cause people to borrow and invest more than they really ought to be doing. And so, yes, even if you had a whole population wholly versed in Austrian Business Cycle theory . . . it would mess things up.
Just like if the price of oil goes to be $100 a barrel, and the government somehow makes it $40, that’s going to screw things up. That’s going to cause dislocations in supply and demand.
. . .
Mosler: I agree that a monopolist like that – for example, OPEC at the margin, they are the price-setter, and they have excess capacity and whatnot. They’ve got 3, 4 million barrels, 5 million barrels a day of excess capacity, and that does prevent market clearing and alter the market for crude oil. So anytime you have a monopolist involved, you’ve no longer got a competitive market. It’s at the opposite end of the spectrum.
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.
Hence, when Murphy reframed the Austrian critique away from interest-rate distortion and towards a general objection to the government’s currency monopoly, he effectively pivoted the debate away away from monetary policy and the realm of political theory. Interestingly, Mosler appeared quite sympathetic to Murphy’s political views:
Carney: Dr. Murphy, how do you respond to that? Is the concern over government pushing down interest rates just a hangover from commodity currencies, and not applicable now, or is that part of the problem, that government has seized control of currency?
Murphy: So yes. Even if it were true that everything that Warren is saying follows – if we start with the assumption that the Fed has such control over the banking system and the government is the issuer of our currency and its legal tender for all debts and so forth – even if everything else he said followed I would still say “ok but I don’t agree that’s a good system to set up in the first place, so why are we letting the government have such control over money and banking?”
Mosler: I don’t necessarily agree either.
Murphy: Ok, we’re making progress in the debate – we’ll try and get some clash perhaps in the second half.
Consequently, the only remaining purely economic disagreement, to the extent it could be called a disagreement, was over the rhetorical question of whether it was appropriate to begin an inquiry into macroeconomic policy with the premise that the government enjoyed a public monopoly over currency by virtue of its coercive taxation power.
On this issue, Murphy appeared to agree in principle with Mosler’s chartalist argument that the state determines what is money when it chooses “That Which Is Necessary To Pay Taxes” (or as some MMTers call it, “TWINTOPT”). However, he argued that because taxation was coercive, MMT’s uncritical adoption of chartalist principles was equivalent to an implicit endorsement of state violence:
Murphy: As far as Warren’s proposals . . . it’s not that I think the stuff with his book is wrong necessarily, and some of it I agree with wholeheartedly. But what he’s saying is technically correct but it’s very misleading, or even more to the point, somebody might erroneously conclude from what he says that’s technically true something that’s the wrong thing to do. So let me give you this analogy:
There’s a wife and husband sitting at the table, they’re looking at the family budget, and the man says “You know what, honey, i’m looking at the family expenses and we cut this and cut that. I need to take a second job. That’s the only way we can make ends meet.” And he has an epiphany – he goes “No no no. I’m just going to put on a ski mask and go out and start holding up liquor stores. We’re not ‘constrained’ by our budget anymore.” And she says “what are you insane? You keep doing that, you push that too much, that ‘policy’ and you’re going to end up in prison.” And he goes “Ok, you’re right, but I just want us to focus on the ‘real’ constraint here. It’s not about our budget, it’s about me going to prison. So let’s just at least now we’re thinking clearly about the things constraining our behavior and our spending.”
Ok, so is what the husband there said wrong? Well, technically no, he’s right. The ultimate thing stopping you from spending too much is that you go to prison for holding up a liquor store, not that you need to get a job and income. . . .
Mosler: What we have to look at is the difference between the issuer and the user of anything. . . . The issuer of anything can’t collect anything until after it gets it out there. Likewise, the U.S. Government is the issuer of the U.S. Dollar in this sense: the dollars used to pay taxes come only from the U.S. Government, or they are counterfeit.
. . . That’s the difference, and that’s why a household gets in trouble, because they have to collect first before they spend. The U.S. can’t be in that position with a floating exchange rate currency.
. . .
Murphy: First of all, John said to Warren “are you in favor of robbing liquor stores?” and he didn’t deny it. . . . I think this is really going to be the crux of the disagreement . . . [A]t best I would say he’s showing that “given the government is going to monopolize the supply of money, all of my things follow.” I would say, still, that’s not a good system because I don’t think the government should be in the business of producing money. Most of us agree that the government shouldn’t be producing cars, well why would we let the government produce the money, which is the most important commodity?
Unfortunately, Murphy did not offer any explanation of why he believed an alternative currency system would necessarily be less coercive. As a result, his negative case floundered when Mosler accepted the critique on face value and challenged Murphy to articulate a better alternative:
Mosler: I like these people who get together and say “we hate government, we’re just going to get together ourselves and agree to do this.” Well that is government. And so you start off and say “well, we’d like to have an army. We’d like to have a legal system.” Well how do you get people to move from the private system to the public system?
You could ask for volunteers – it doesn’t work all that well. It’s been tried. The way that we do it – now you might come up with a better way – is you slap on a tax in something that nobody has, and in order to get the funds to pay that tax, you have got to come to the government for them, and that way the government can spend its otherwise worthless currency to provision itself. . . . the difference between litter and money is the tax man.
Mosler also noted (correctly, in my view) that Murphy’s avenue of critique, while theoretically interesting, was ultimately tangential to contemporary policy analysis:
Mosler: A monopoly might not be the right way to do it and you might have a better system, which I’d like to hear, but right now we’re talking about the U.S. today, and how does it work.
Conclusion
My take from this exchange is that Mosler was correct to argue that the traditional Austrian Business Cycle story of government distortion of market-determined interest rates is wholly inapplicable to contemporary floating currency systems, since all interest rates are set as a policy variable and hence are all “artificial” (with the possible exception of the permanent zero rate that Mosler alluded to above).
Consequently, I am led to conclude that the contemporary relevance of Austrian theory – to the extent it is relevant at all – is limited to its normative case for the adoption of an alternative currency system that is not premised around government monopoly and coercion. This case will be explored in the proceeding section.
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