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Wednesday, December 11, 2019

On Gundlach's Misrepresentation Of MMT

Jeffrey Gundlach launched a rather bewildering attack on Modern Monetary Theory (MMT) in a recent Yahoo! finance article. It is hard to say whether this was entirely serious. However, it continues the pattern of attacking a straw man version of MMT -- apparently based on watching a couple videos -- rather than referencing even a primer written by an academic aimed at a broad audience.

The article transcript of a video interview has two key sections.
"It just says, 'Hey, if you're borrowing your own currency, you can just have infinite amounts of money,” Gundlach said in a recent wide-ranging conversation with Yahoo Finance.
"Basically, what they're doing is they're saying, 'As long as the interest rate is below the growth of the economy, then everything's fine. And, so it's OK to have basically tons of debt as long as the economic growth is there, and so on,'" the billionaire explained.
"When you issue all the bonds for 10 or 30 years, that's a fixed interest rate. So the fact that interest rate is lower than the growth of the economy — that sounds pretty good — but what happens if the growth of the economy turns negative?” he asked.
One of the key MMT recommendations that Gundlach somehow missed in his research was that the overnight rate would be locked at 0% and that bonds would no longer be issued.  (Given that the possibility that he would no longer be able to make bond yield forecasts was such a horrifying prospect that this was subconsciously blanked out.)

So, in order for things to go badly, the economy has to have a negative nominal GDP growth. If the government is spending oodles of dollars, are we seriously going to believe that the economy will shrink in nominal terms? (In case why this is unlikely is not obvious, one may look up the relationship between the price deflator and nominal GDP.)

One could raise any number of serious objections to various MMT policy proposals, but the prospect of nominal GDP growth dropping below the "cost of funding" is not one of them. As result, although it would be interesting to have another debate about MMT, it is literally impossible to so in this case.

Why the Misrepresentation?

The only interesting thing is why Gundlach so badly misses the mark. Two possible explanations appear to be.
  • He watched the wrong videos. The concepts of MMT were presently either incorrectly, or in a fashion that would be misunderstood by someone with a conventional mindset.
  • It is part of a deliberate strategy to push MMT outside the acceptable bounds of discourse. (For example, it is a signal that nobody working for Gundlach should mention MMT in internal meetings.) Although that sounds like a bit of far-fetched conspiracy theory, it was certainly how the mainstream economics profession historically reacted to things like Marxism. Certainly this explanation seems to be behind some of the misrepresentations of MMT by some mainstream economists (a popular pastime about a year ago now).
From my perspective, I cannot do much about the attempts of high-profile economists to police the bounds of acceptable thought. However, I think there is obviously still a need for primers on MMT aimed at a more advanced reading audience. That was always on my "to do" list (Understanding Government Finance was a partial step towards a MMT primer, but only the bits associated with government finance), but I wanted to wait for the textbook by Mitchell/Wray/Watts.

My concern with presenting MMT is the desire to change the framing of the language around government finance. Although that is a laudable goal, you run into two issues when presenting to an audience with a more conventional mindset. In addition to wanting to convince them about your theories, you also need to convince them to change how they express ideas. The second step may easily be harder than the first. As a result, I generally try to keep my explanations more conventional, only highlighting differences when there is a big operational difference between theories.

Looking forward, I hope that someone will actually read some legitimate MMT literature and have something new and interesting to say about it.* (I need fodder for articles...)


* The "external constraint" is neither new, nor interesting.

(c) Brian Romanchuk 2019


  1. "One of the key MMT recommendations that Gundlach somehow missed in his research was that the overnight rate would be locked at 0% and that bonds would no longer be issued."

    Some MMT literature I've read has hinted at breaking the money-bond link but I have never before seen the concept so boldly stated.

    Much of my writing has supported the money creation side of MMT but I'm certainly unwilling to support a break in the money-bond link. Such a break would seriously damage any expectations of future value of money, making it nearly unusable as a store of value (in my opinion).

    If you need fodder for articles, you might explain how you think MMT money would find value and actually work as a store of value without a money-bond link. (Maybe you could convince me but I doubt it.)

    1. The value comes from being the tax-credit. Bonds serve no purpose.
      The promissory notes of a currency issuer for their own currency might as well just be direct spending of the currency. Think about it.

    2. Yes, I think I see what you are saying. Said in a somewhat different way, the Fed-Treasure combined issue of money+bonds is the issue of twoXmoney. First comes the money, later comes the money again when the Fed buys back bonds from the public.

      Please let me point out why this is unfair to workers if the bonds are never-ever paid back with tax generated funds. Workers build equity for their personal use day-by-day as they work. They only get paid at the end of the week, after their contribution to economic betterment is complete. They are paid in money. How should they view the value of this token in memory of their weeks work?

      My view is that the value of money should endure over time, just as the beneficial remainder of their past weeks work endures. With enduring value assured, a worker can build for the future, knowing that his past work is memorialized in the tokens he received and can be recovered by purchasing equal value contributed by others. A sliding value of money defeats that expectation.

      When bonds are missing and workers are paid with new money not first earned by others, there is no promise to square things up in the future.

  2. The value of money can only be obtained by constant looking after the real economy where real value is produced. If that isn’t done value will drop no matter what.

    1. Actually, the value of money has often increased when the real economy is suffering depressions. It's called deflation and probably is why most economists don't like deflation.

    2. Well Zimbabwe and Weimar are good examples of collapsing real economies where the value dropped.
      Please explain the mechanism how money value increase under fiat money system with a floating exchange rate while the real economy is shrinking.

    3. People have continuing commitments that require income in the fiat currency, as in debt or families, but lose their current source of income (like a job). If they can't find a replacement at their previous level of income, and are unwilling to ditch their commitments, they most likely will have to accept a lower income in the fiat money for the same level of labor effort provided. And, in other words, the value of the money has increased relative to their labor. That is one mechanism.

    4. In your example you’re still talking about an economy where real value is produced to an high extent but income is lowered.

      There’s nothing new in that lowering income (or stagnating wages while output is increasing) has a deflationary impact on the economy as long as you have a high enough real economy activity. But destroy enough of the real economy were the output is created and you will get inflation unless you can substitute that with imports or keep slashing income. Imports as a substitute is not a sustainable solution especially for smaller economies. Neither is slashing income as it can only be done to certain level as purchasing power decreases. Sure you can rely on that export will cover imports but that output is once again a part of the real economy. If export also is destroyed to a high enough extent then no way money value will be contained where you have floating exchange rate.


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