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View Diary: Modern Monetary Theory vs the Fiscal Cliff (65 comments)

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  •  As I understand it, demand-pull inflation is (1+ / 0-)
    Recommended by:
    Calgacus

    when the aggregate of demand overwhelms the aggregated supply and this is what happened with OPEC. The demand was in the private sector and it was the private sector that fell so hard into an economic tailspin. Deficit spending did not come in to play until the public sector tried to dig the private sector out of its hole. In MMT, one of the two rules is that all three sectors cannot be in deficit. In the 1970's OPEC nations ran the tables with us and the trade deficit pounded up. At the same time, the private sector was choked down in response. The public sector was in the unenviable position of trying to step between the two. All of which was complicated, of course, by the fact that the actions of OPEC were entirely politically driven, as was their right, but the deep change in policy came as a shock to the US economy regardless.

    "When in doubt, do the brave thing." - Jan Smuts

    by bunnygirl60 on Sun Nov 25, 2012 at 01:42:49 PM PST

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    •  But there was no aggregate of demand overwhelming (1+ / 0-)
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      semiot

      supply, there was a manipulated shortage in one key commodity that spread across the board.  This is classic cost-push inflation.  The inflation was triggered by a manipulated cost-push rise in demand for oil, which inflated the whole economy. The neo-liberal economists, though, called it a demand-pull created inflation and used it as an excuse to begin their march into the fiscal austerity madness we are now experiencing.

      •  Yes (6+ / 0-)

        the comments you're getting about inflation are right. There are different types and only demand-pull inflation is caused by Government deficit spending. Cost-push results from suppliers manipulating a market they control. That was the cause of the stagflation of the 70s that sank Jimmy Carter and gave us Ronald Reagan.

        My view of this inflation is that the Federal Reserve and Paul Volcker exacerbated it by rising interest rates to try to control the money supply. The policy was a abject failure and created a harsh recession at the end of carter's term and the first few years of Reagan. The inflation broke because Natural Gas was de-regulated near the end of Carter's Administration and that led to new supplies of NG and an oil glut during the early 80s. The Saudis weren't able to maintain their manipulated oil cartel prices, and the inflation part of the stagflation ended. Then Volcker rolled back the interest rates, and the Reagan prosperity was created from the pent up demand.

        On tools to fight inflation. We have a system of automatic stabilizers. Federal taxes, State Taxes, Unemployment Insurance, Food stamps, Medicaid for poor people. When the  economy starts going up Federal spending automatically starts to decline and tax revenues start going up. These do much to cool the economy. MMT economists suggest other policies that would work counter-cyclically. Specifically, three policies:

        -- Payroll tax holidays
        -- State Revenue Sharing
        -- Federal Job Guarantee at a living wage with full fringe benefits

        These would heat up the economy during recessions, but the costs for all would fall when the recession is over since the full payroll tax could automatically kick in at full employment, State revenue sharing could be set to end, and JG spending would automatically fall as the private sector hires away JG participants.

        If these tools fail to contain demand-pull inflation then increasing taxes and imposing wage and price controls would take care of the problem.

        For cost-push inflation cutting Government spending  would just create stagflation as happened when silly Jimmy Carter keep trying to balance budget during his term. So there, you have to fight it by trying to free up the commodity markets by vigorously enforcing anti-speculation laws, trying to find new sources of supply as in the Natural Gas case, and using price controls along with rationing as we did in WW II.

        •  Re. inflation - Oooooo, now I get it. Thank you so (2+ / 0-)
          Recommended by:
          psyched, jellyyork

          much for taking time to correct me. When Arliss posts again, I'll make sure the correction gets in.

          As for the Saudis, they backed down for a LOT of reasons not the least of which were the DoD projects and support they were provided at that time. Also, they has a great deal on their hands with the tension in Egypt as it impacted their own internal political stability and, you know, always the situation with Israel. I may be an economics newbie but Middle East politics is where I live. But that is for another blog post at another time. :-)

          "When in doubt, do the brave thing." - Jan Smuts

          by bunnygirl60 on Sun Nov 25, 2012 at 07:34:59 PM PST

          [ Parent ]

        •  A Couple of Things (1+ / 0-)
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          semiot

          Firstly, MMT gets into hot water when it starts specifying fiscal policy.

          The fact is that two thirds of money created came about from mortgage loans by banks. ie it is deficit-based, but land-backed, by the capitalised value of land/location rentals and of the capital invested in the land/location.

          If MMT's fiscal remedies focus exclusively on labour, then they run the risk that we will simply see the increased income to Labour captured by landlords or giving rise to the re-inflation of the property bubble (since people will now be able to afford greater loans).

          In other words, MMT must also address the fiscal basis of tax with other taxes, where I recommend taxing unearned income from privilege, rather than earned income by Labour.

          ie taxes on land rental value, and also IMHO taxes on the privilege of IP and limited liability (dispensing with corporation tax meanwhile).

          Second point is that we are currently in correlated equity and commodity market bubbles, and particularly an oil market bubble.

          These bubbles have been caused by the massive flood of 'inflation-hedging' dollars away from T-Bills yielding 0% to commodities as an asset class.

          This inflation hedging has been made possible by the tidal wave of new funds (ETFs; ETPs Index funds and so on) and  - in an example of Soros' reflexivity - the entry into the market of these funds has

          (a) perversely caused (by cost push) the very inflation they seek to avoid; and

          (b)killed the price formation and 'financialised' every market in which they are dominant

          Oh, and cui bono? It's the producers, stupid.

          In my own specialism, the oil market, we have seen the greatest market manipulation in the history of commodity markets.

          For the the last four years (prior to that from 2005 to 2008 we saw a private sector bubble) the Saudis have managed to reinflate and keep the oil price inflated by lending oil to and borrowing dollars from funds sold to 'muppets' by investment banks.

          This has been achieved using the very same opaque 'prepay' instrument which enabled Enron to pull the wool over the eyes of investors and creditors for years.

        •  "imposing wage and price controls" (0+ / 0-)

          I am at a loss why, given all the empirical data on this, people continue to think these options ever work.

    •  For a simple summary view of the definition of (0+ / 0-)

      Cost-Push inflation and OPEC look  here.  Also, Warren Mosler talks about OPEC and inflation in his Seven Deadly Innocent Frauds...  You will also see comments about cost-push inflation in Bill Mitchell's billyblog.  Thanks again for taking the time to add your voice to MMT!

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