Saturday, 3 May 2014

Leading market monetarist re-discovers paradox of thrift.

David Beckworth, leading market monetarist, claims that the more money people save, the lower is aggregate demand, all else equal. Or put another way, the higher the demand for money, the lower will aggregate demand be, all else equal.
Now that’s just Keynes’s so called “paradox of thrift”. (The paradox of course is that saving is allegedly virtuous, but saving money can have an undesirable effect: raising unemployment.)
But market monetarists don’t care for Keynes: at least another leading market monetarist, Scott Sumner, is regularly dismissive of Keynsianism.
And Scott Sumner also hates Modern Monetary Theory. But Warren Mosler is a leading MMTer and Mosler’s law states that “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.” (See sentence in yellow at the top of Warren’s site.)
I.e. Warren is saying that given a recession, we should just create central bank money and spend it (and/or cut taxes). And that has two effects: the fact of spending more will increase numbers employed. And second, the increased money supply ameliorates what Beckworth calls “excess money demand”.
So do we now take it that market monetarists have been converted to Keynsianism and MMT?


  1. For MMT, all deficit spending is "creating money" (all spending for some). MMTers don't believe that just because CB balances got shuffled between checking and saving that the money disappears and is now "debt" or "borrowing".

    Issuing 3 month T-bills at .03% forever is no different functionally than issuing reserves only and paying a .03% IOR

    1. Fair point. Certainly Warren Mosler keeps making the point that expanding the monetary base and reducing government debt (e.g. via QE) is no different to shifting money from a term account to a current or checking account. On the other hand we have to draw the diving line between money and long term loans somewhere. Most countries classify money in checking accounts and term accounts where the depositor can get access to their money within a month or so as “money”. While anything longer that one or two months is not classified as money. But it’s impossible to prove that two weeks or one month or two months is “the” definitive boundary.


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