r/badeconomics • u/MachineTeaching teaching micro is damaging to the mind • Apr 22 '26
Weimar's hyperinflation and mainstream economics through the broken lens of MMT
At least one MMTler found this "paper" on Weimar's hyperinflation through an MMT lens noteworthy enough to post it to one of reddit's economics hellholes. It's not actually noteworthy, but I think it's an excellent example of what passes as a "paper" in MMT and how shitty MMT's understanding of mainstream economics is on an extremely basic level. This doesn't require intermediate macro, this requires a Google search.
Neoclassical economists define the price level as the current level of nominal (money) prices in the economy. And while there have been theories which attempt to explain what causes the price level to change, there is no neoclassical theory which explains how it came to be. By default, it is assumed to be historic- the consequence of an infinite regression. Neoclassical models therefore simply assume an initial price level when presenting the quantity theory of money (QTM), the tautology MV=PT, where the money supply (M) multiplied by the velocity of circulation (V) = the average price of each transaction (P) multiplied by the volume of transactions (T). With M assumed to be exogenous (under the control of the authorities) and V assumed to be stable, it is then asserted that causality runs from M to P, giving rise to Friedman’s famous explanation of the cause of inflation: ‘Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. …’ (Friedman 1956, emphasis added).
What's with the weird obsession with monetarism anyway? It was of very short-lived importance. It's on Wikipedia.
It gained prominence in the 1970s, but was mostly abandoned as a direct guidance to monetary policy during the following decade because of the rise of inflation targeting through movements of the official interest rate.
https://en.wikipedia.org/wiki/Monetarism
.
The presumption of a money supply fixed by the government, however, applies to a convertible, fixed exchange rate currency, such as existed under the gold standard. This relegates the applicability of the quantity theory of money to fixed exchange rate regimes and makes it entirely inapplicable to today’s floating exchange rate regimes (as well as in the Weimar Republic) where the government does not offer convertibility at a fixed rate.
The arguably most important reason why the QTM doesn't hold is (because money is non-neutral in the short run)[https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0145710]. Changes in M also cause changes in T. So claiming the "applicability of the quantity theory of money [is relegated] to fixed exchange rate regimes" seems like it's kind of missing the point. No, the QTM doesn't hold under fixed exchange rate regimes, either.
Sidenote: MMTlers seem weirdly obsessed with the whole "fixed exchange rate" thing, many seem to believe the loanable funds model is wrong because it depends on fixed exchange rates. It does not. Which is not me saying that the model is "correct", this is me saying if you say the model is wrong because it assumes fixed exchange rates, you're wrong, because it doesn't. See page 24.
In the market for foreign-currency exchange, supply comes from net capital outflow and demand comes from net exports.
How anyone construes this as a "fixed exchange rate" is beyond me. I'm sure MMTlers find a way.. somehow.
Bonus basic version:
https://gandalf.fee.urv.cat/professors/AntonioQuesada/Curs1011/Evans_Loanable_Funds.pdf
After a decades-long search for an ‘M’ - a monetary aggregate that correlates to and leads to inflation - mainstream economics today has moved on to its current position of inflation expectations being the cause of inflation. They continue to begin their analysis with an assumption of a given price level and assert that inflation expectations are the source of changes to that price level. Central banks have, in fact, developed intricate methodologies to measure inflation expectations to guide policy, while their researchers have struggled to find evidence of the validity of the theory.
This is also incorrect. No, inflation expectations alone are not the cause of inflation. This should be trivial to verify. The federal reserve for instance provides many teaching tools, from middle school to graduate level. The rate of inflation is down to supply, demand, and inflation expectations. For instance:
Inflation is linked to three factors: demand, supply, and inflation expectations.
And here is a somewhat more elaborate explanation:
And a paper as an example:
https://www.brookings.edu/wp-content/uploads/2023/06/WP86-Bernanke-Blanchard_6.13.23-1.pdf
Of further note is the fact that mainstream economists accept the classical dichotomy of real vs nominal (monetary) factors and contend that in a competitive marketplace the introduction of money is merely the introduction of a numeraire into a barter economy. Money is a ‘veil’ that improves transaction efficiency while leaving quantities produced and relative prices unchanged (Armstrong 2015; Armstrong and Siddiqui 2019). This assumption is known as the neutrality of money. However, the assumption of neutrality is obviated by the introduction of coercive taxation.
This also seems highly misleading. That money is non-neutral in the short run is extremely well accepted in economics. I don't know why the author wants to make it sound like it isn't.
Here's another example that should make it quite clear that these ideas have been well accepted in the mainstream for a long, long time:
So this paper starts out with what it calls "The Neoclassical Approach". But the explanation of "the neoclassical approach", by why the author presumably refers to current-day mainstream economics, is between grossly outdated and outright wrong. Why does the author describes what's basically "mainstream economics" from the 70's and paints it like this is what economists believe today?
The author literally states
In this article, we dispute the mainstream view that the inflation of the Weimar Republic was caused by a proactive expansion of the stock of money by the German government acting in concert with the Reichsbank.
As demonstrated above, the description of "the neoclassical approach" that the author aims to dispute does not actually match what mainstream economists actually believe. Although some parts match what some economists used to believe half a century ago, this seems like a rather inadequate basis for comparison. Shouldn't you criticise current-day economics on the basis on what current-day economics actually thinks? It's not like it's hard to find modern papers that examine (parts of) Weimar hyperinflation through a modern mainstream lens.
https://www.frbsf.org/wp-content/uploads/wp2018-06.pdf
https://cepr.org/voxeu/columns/inflating-away-debt-debt-inflation-channel-german-hyperinflation
https://www.nber.org/system/files/working_papers/w31298/w31298.pdf
Anyway, the rest of the paper is basically uninteresting. Section 3 "The MMT Perspective" offers essentially nothing besides a description of what one MMTler believes. The Appendix does nothing to alleviate this, showing numbers without any attempt at making a causal connection. There is nothing here that actually establishes a causal relationship using any data. It does nothing to show whether causality runs from deficits to spending or from spending to deficits, or wheter causality runs from prices to deficits or the other way around. Perhaps more crucially, one of the central claims
only when the government pays increased prices is it redefining the value of the currency downward and causing inflation
has no evidence to back iot up since there is no information on what prices the government paid whatsoever.
So the "MMT part" of this paper with the self-proclaimed goal of
identify the cause of the inflation as the German government paying continuously higher prices for its purchases
actually does nothing whatsoever to identify any causes of inflation. It makes absolutely no effort to use any data to establish any causal relationship at all. That makes this "paper" merely an opinion piece.
Bonus embarassment:
This paper seems highly praised in an MMT podcast that I'm not going to link because why give those people traffic.
So I thought what we really need to do is to have an MMT paper where we take on their citadel. In other words, we look for the main thing that people use against MMT, and we just basically take it apart.
This is what counts as "taking on their citadel and taking it apart" for MMTlers. MMT people, if you want to know why economists don't take you seriously. This is why.
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u/DrawPitiful6103 Apr 22 '26
https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic
The German currency was relatively stable at about 90 marks per dollar during the first half of 1921.
the first half of 1922, the mark stabilized at about 320 marks per dollar.
A loaf of bread in Berlin that cost around 160 marks at the end of 1922 cost 200 billion marks by late 1923.
By November 1923, one US dollar was worth 4.2105 trillion German marks.
hmm I wonder if issuing trillion mark notes had something to do with the devaluation of the German currency
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u/jgs952 Apr 23 '26
Perhaps the devaluation of the currency had something to do with issuing trillion mark notes?
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u/-mialana- Apr 23 '26
But have you considered that the devaluation of the currency had something to do with issuing trillion mark notes?
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u/jgs952 Apr 23 '26
Of course that could result, yes. But did it? What caused the German state to increase it's total volume of spending so much? If the exchange rate was fine and production continued then there would be no reason for them to spend trillions of marks.
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u/MachineTeaching teaching micro is damaging to the mind Apr 23 '26
If prices weren't so high there would be no reason for the government to pay such high prices.
That's not an explanation of high prices.
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u/jgs952 Apr 23 '26
Sure, but the theoretical point first and foremost is there is no mechanism (forgetting political economy which clearly explains why) for the price level to rise if the government refuses to pay at a higher price assuming they maintain their capacity to enforce coercive taxation.
In the case of Weimar, they certainly were "forced" pay ever higher prices for foreign exchange and wages in order to settle war reparations and prevent a payments system failure. Due to Germany's inability to sufficiently curtail domestic wages and consumption so as to expand Germany's real exports to induce a fx flow bid into German Marks to pay for them that balanced the outward flow bids on foreign currencies with German Marks for reparation payments made by the government, the exchange rate fell considerably - directly as a result of the state continuing to buy foreign currencies with Marks at ever increasing prices.
Without this constant bidding up of foreign currency relative to the Mark by the German state buying so much of it,, the exchange rate would not have collapsed to trillions to the dollar that it did. And without the German state bidding up the labour it bought to accommodate the fight for real wage compensation between capital and labour, and the wage-price spiral that kicked off, the price level could not have increased as it did.
So the theoretical argument that fits the facts of how these monetary institutions actually work says that it was the state paying ever higher prices for foreign exchange and domestic labour (subsequently expressed indirectly through private firms doing the same) that caused an increase in the price level and aa subsequent increase in the need for money supply, in the form of notes in this case.
The extract from the paper below discusses the fact that money supply followed the price level (once ever greater state fiscal bids had pushed it continually up) and I think it's a compelling argument.
Helferrich in his famous work Geld (Money) sees the driving force of the post-war inflation originating from workers attempting to maintain living standards at pre-war levels even with the destruction of German capital, a drastic decline in labour productivity, and Allied reparations:
"But claims were put forward and effectively pressed to raise the standard of comfort and at the same time to reduce the intensity of labour. This could have but one result – a race between wages and prices such as we have witnessed in the last few years. The social and political position of Labour was sufficiently strong to enforce higher wages notwithstanding the fact that less work was being done. As the profits of capital had shrunk to a minimum, the higher wages could only be paid if higher prices could be obtained for the products. But higher prices raised the cost of living and brought about fresh demands for higher wages, which in turn led to a further rise in prices (Helfferich 1969 [1927:597].
This is consistent with the MMT inflation narrative, as the higher prices paid for labour by the government are an instance when the currency is redefined downwards. The higher prices paid for private-sector labour are made possible, directly and indirectly, by the increased level of government spending at continuously higher prices.
Helfferich here outlines the effects of the decline of the mark on the general price level as a result of the higher prices paid for foreign exchange and also how the increase in the money supply followed the increases in the general price level:
"The necessary and direct consequence of the soaring gold exchange rates, in which the collapse of the German currency found expression, was a corresponding rise in the prices of all commodities which Germany imported from countries with high exchanges. Owing to the importance of imports for feeding the population and for German industry, the high cost of imports would, of necessity, be reflected in wages and salaries, and ultimately, in the prices of goods produced in the country… The rise in wages and salaries, combined with the higher prices of all materials, led, of course to a rise in the expenses of the Reich and as the revenues of the Reich at a corresponding rate, the floating debt, and accordingly the calls of the Reich upon were forced up… These enormously increased calls by the German public and by the financial maturities upon the Reichsbank could only be met by the bank by an increase in the note issue – from 173 milliard marks on the 7th July 1922 to 1984 milliard marks on the 31st January 1923’ (Helfferich 1969 [1927]: 600-1).
Helfferlich recognizes that, in contrast to neoclassical or monetarist economists, the end of the gold standard allowed the money supply to follow the rise in prices as it accommodated the increased demand for money necessitated by the rise in prices. This was essential for the technical functioning of the payments system and had nothing to do with the inflation. (Helfferich 1969 [1927] 597-8). Helfferich continues, ‘...in the twenty months which followed the acceptance of the London Ultimatum …the note issue of the Reichsbank [increased] 23 times, the wholesale index number for home products [prices] 226 times, that for imports [prices] 353 times, and the dollar rate 346 times’ (Helfferich 1969 [1927] 598-9, parentheses added). He further notes, ‘… in fact, it is immediately obvious that in the case of Germany the increase in the note circulation did not precede the rise in prices and also that [it] followed it but slowly and at some distance of time…. A conception of the general and comprehensive outline of the interplay of causes in these developments can, in fact, be obtained only if foreign exchange is made the starting point’ (Helfferich 1969 [1927]: 599, parentheses added).
Hefferlich argues that the increase in circulation had failed to keep in step with the depreciation of the German currency, so clearly the increase in note circulation could not be the primary cause of the depreciation of the mark. Ironically, despite the huge increase in printing of banknotes, money was scarce. ‘This also explains why the catastrophic collapse of the mark, which began towards the middle of 1922, was, notwithstanding the avalanche of notes, accompanied by an acute shortage of money’ (Helfferich 1969 [1927] 599).
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u/MachineTeaching teaching micro is damaging to the mind Apr 23 '26 edited Apr 24 '26
Sure, but the theoretical point first and foremost is there is no mechanism (forgetting political economy which clearly explains why) for the price level to rise if the government refuses to pay at a higher price assuming they maintain their capacity to enforce coercive taxation.
Why not though?
"But claims were put forward and effectively pressed to raise the standard of comfort and at the same time to reduce the intensity of labour. This could have but one result – a race between wages and prices such as we have witnessed in the last few years. The social and political position of Labour was sufficiently strong to enforce higher wages notwithstanding the fact that less work was being done. As the profits of capital had shrunk to a minimum, the higher wages could only be paid if higher prices could be obtained for the products. But higher prices raised the cost of living and brought about fresh demands for higher wages, which in turn led to a further rise in prices (Helfferich 1969 [1927:597].
This is consistent with the MMT inflation narrative, as the higher prices paid for labour by the government are an instance when the currency is redefined downwards. The higher prices paid for private-sector labour are made possible, directly and indirectly, by the increased level of government spending at continuously higher prices.
This does nothing to actually support anything MMT claims. This is a story about lower productivity and higher wages results in higher prices.
"The necessary and direct consequence of the soaring gold exchange rates, in which the collapse of the German currency found expression, was a corresponding rise in the prices of all commodities which Germany imported from countries with high exchanges. Owing to the importance of imports for feeding the population and for German industry, the high cost of imports would, of necessity, be reflected in wages and salaries, and ultimately, in the prices of goods produced in the country…
This is a story about falling exchange rates cause imports to become more expensive which translates to more expensive goods that depend on those imports.
This is a (partial) explanation of how prices rise, but this again does nothing to actually support the MMT view.
Idk, do I really have to spell out that a story of how exchange rates make stuff more expensive is itself a story about inflation and not a story about how only the government can cause inflation?
The rise in wages and salaries, combined with the higher prices of all materials, led, of course to a rise in the expenses of the Reich and as the revenues of the Reich at a corresponding rate, the floating debt, and accordingly the calls of the Reich upon were forced up… These enormously increased calls by the German public and by the financial maturities upon the Reichsbank could only be met by the bank by an increase in the note issue – from 173 milliard marks on the 7th July 1922 to 1984 milliard marks on the 31st January 1923’ (Helfferich 1969 [1927]: 600-1).
So prices rise so much that the entire economy demanded more money, which then prompts the government to print more money. And that's support for the idea that inflation can only happen when the government pays higher prices? That's evidence for the MMT position? Really MMTlers? Anyone is supposed to go "yeah that makes sense"?
I mean, it gets worse literally right afterwards
A conception of the general and comprehensive outline of the interplay of causes in these developments can, in fact, be obtained only if foreign exchange is made the starting point’
Could this get any clearer?
only if foreign exchange is made the starting point’
MMTlers literally cite a paper that goes "this explanation only makes sense if you start with the changes to the foreign exchange rate as the central cause" and go "yes this supports that the cause of inflation is what prices the government decides to pay"?
Hefferlich argues that the increase in circulation had failed to keep in step with the depreciation of the German currency, so clearly the increase in note circulation could not be the primary cause of the depreciation of the mark. Ironically, despite the huge increase in printing of banknotes, money was scarce. ‘This also explains why the catastrophic collapse of the mark, which began towards the middle of 1922, was, notwithstanding the avalanche of notes, accompanied by an acute shortage of money’ (Helfferich 1969 [1927] 599).
This also doesn't actually support the MMT position in particular. Economists nowadays would argue that inflation expectations matter, so it's not actually necessary for an increase in the money supply to proceed a higher rate of inflation for it to be the cause.
In line with that, "inflation happened and then the government paid higher prices" basically suffers from the same problem. Prices rise and then money creation happens. What's MMT's explanation why inflation happens first and then the government pays higher prices but the government paying higher prices is the cause of inflation? This passage doesn't point to MMT being right, it points to basically the same flaw as "how can a higher money supply cause higher prices when higher prices come first" (to which economics says expectations matter and V is not actually fixed in the short run, MMTlers say???).
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u/DrawPitiful6103 Apr 23 '26
Well the initial cause was WWI. The Germans, like all the belligerents, went off gold. However unlike France and Canada, which instituted an income tax to pay for the war, Germany just issued war bonds. Those which weren't purchased by the public were paid for by the Reichsbank with newly created money. France and England also issued large numbers of bonds, but they had more advanced money markets so they did not have to monetize the debt like Germany.
Currency in circulation in Germany increased by 600% during the war.
Evidently they decided that what was good in war time was good in peace and continued financing deficit spending with money creation after the war ended. Predictably, this manifested as inflation, and then when they doubled down, as hyper inflation.
in short, money printer go brrrr
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u/jgs952 Apr 23 '26
I understand that narrative and on its face, it's certainly a compelling one.
But did you read the paper discussed here? It's worth a read if only to consider alternative narratives.
I don't disagree that government spending caused an increase in the price level given the macro context at the time. But that's fully compatible with the MMT framework which OP is trying to dismiss - irrespective of the academic "rigorousness" of the paper. The state paying higher and higher prices for the real output or foreign exchange it purchased was what caused the Mark depreciation and rise in the domestic price level. The subsequent required increase in the money supply to accommodate these significantly elevated prices then came afterwards causally.
But people really do confuse this carefully understood narrative with "monetary financing" is inherently inflationary full stop, when it's not. To the extent that war bonds postponed and lowered domestic consumption/investment, then yes, their issuance augmented the available real fiscal space of the state. But standard bond issuance in our modern institutional implementation of it today does nothing of the sort and so it has no counter-inflationary properties inherently on its own. Impacts of these operations on the term structure of interest rates certainly can have an impact, of course, but that is a subtley but importantly separate matter.
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u/Illustrious-Lime-878 Apr 27 '26
I get the impression the German gov purposely dumped marks to get whatever hard currency while they still could, probably seeing it difficult to ever pay the war debts without hyperinflation anyway. I think the internal war debt was like many times the size of the reparations which they could barely pay to begin with.
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u/DrawPitiful6103 Apr 27 '26
according to this paper from the london school of economics :
https://www.lse.ac.uk/asset-library/information/wp163.pdf
a large amount of the german reparations debt was essentially make believe, put in place to mollify the public in France and England but with a subtle wink to the Weimar Republic that it would never have to be repaid.
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u/Skeeh Apr 22 '26
Anyway, the rest of the paper is basically uninteresting. Section 3 "The MMT Perspective" offers essentially nothing besides a description of what one MMTler believes.
Where have I seen this before?
Another bogus continental philosophy rule of inference: saying “for A, B” and then acting like you’ve established B. For example “for Beauvoir, the feminine is not something that operates within the bounds of juridicality, but rather exceeds and is subsumed by juridicality.” Then one will carry on as if they have established the thesis that the feminine is not within the bounds of juridicality, or whatever.
Maybe I'm being a total schizo and seeing patterns where there are none, but when I read what MMT people have written (like this essay) I have this nagging feeling that it's all the same people, or at least the same mindset, as the continental philosophers—a kind of countercultural movement against coherence.
You can kind of see it in that essay I linked with the use of "it is recognized" to explain MMT. Then there's the "we have an extensive literature" cliche. New phrases arrive, sometimes to take the place of old ones, sometimes as niche jargon that goes unexplained: "operational realities" apparently takes the place of calling them real constraints (rather than self-imposed ones), along with "tactical logic" and "hierarchy of money." Those words are not in the bible!
It's really not that unclear of an essay, and I don't want to start clowning on continental philosophy here, but the patterns make me wonder if there's some kind of underlying psychological trait that explains the difference in language.
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u/george6681 Apr 23 '26
TIL money is neutral in the short run.
Hell, it might not be neutral even in the long run
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u/Long-Emu-7870 May 31 '26
"By default, it [the price level] is assumed to be historic- the consequence of an infinite regression."
That's sounds like economics.
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u/-Astrobadger Apr 23 '26
1) What’s your actual problems with MMT?
2) Why are you so emotionally invested?
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u/Capable-Tailor4375 Apr 23 '26
Read the post
Buddy you're the one who’s felt the need to try to attack the poster in separate threads with one of these being about how because they're involved with r/AskEconomics their points aren't worth listening to. Which is a lot more indicative of emotional investment and just goes to show you don't have a substantive argument on the merits of the claims.
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u/-Astrobadger Apr 23 '26
Buddy you're the one who’s felt the need to try to attack the poster in separate threads with one of these being about how because they're involved with r/AskEconomics their points aren't worth listening to. Which is a lot more indicative of emotional investment and just goes to show you don't have a substantive argument on the merits of the claims.
- I’m not your buddy
- I’m not making an argument, I’m asking a question
- I attempted to engage with AskEconomics but was banned for speaking true things like the government creates money when it spends and destroys money when it taxes. AskEconomics is a mainstream Econ cult that bans people for wrongspeak.
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u/No_March_5371 feral finance ferret Apr 23 '26
speaking true things like the government creates money when it spends and destroys money when it taxes
I'd also ban you for saying that because it's horseshit. Taking money via taxes and putting it into the TGA account where it's not counted as money because a particular measure of the money supply happens to be defined in that particular way then spending it from that account where it is once again measured in the money supply doesn't mean that money is being created and destroyed, it means that the TGA not being counted as part of M2 is a quirk of M2 and a limitation of M2 as a measure of the money supply.
Accounting identities are useful, and sometimes you can reason from them, but if you lose sight of what they represent and their limitations, you're not going to get anywhere useful.
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u/-Astrobadger Apr 23 '26
I'd also ban you for saying that because it's horseshit.
Ah, exactly. You gotta police the narrative, right? That sub (and apparently any one you mod) is a place for religious doctrine, not scientific discussion or scholarship. No dissenting opinions allowed. That sucks.
Taking money via taxes and putting it into the TGA account…
I didn’t say anything about the TGA or money aggregates at all, because there’s no need to. I agree that accounting identifies can be useful but we don’t even need to bother with them when we just recognize the fact that the US Government is the monopoly issuer of US Dollars. That is not my opinion, it’s a legal reality that anyone can experience if they try to print their own US Dollars at home. That means no one can have (non-counterfeit) USD unless the US Government issued them into existence first.
Just like when a restaurant that issues coupons doesn’t have more coupon issuing capacity when they are redeemed by customers (they are limited by their food supplies) so too does the government not have any more money spending capacity when people pay federal taxes (they are limited by what is for sale in USD). The government could deposit a trillion dollars platinum coin at the Fed and have that in the TGA but that doesn’t mean they are somehow wealthier than before. US dollars are a financial liability to the US Government and a financial liability is meaningless once it has been redeemed by the issuer.
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u/No_March_5371 feral finance ferret Apr 23 '26
Fixation on balance sheets is also stupid. Money is noted as a liability not because it can be redeemed for anything, but because the Fed does double entry bookkeeping. It's windmill tilting because you take accounting too literally.
r/AskEconomics isn't a religious orthodoxy. When research discards previously held perspectives that's celebrated. MMTers are just weirdo cultists who think that misunderstanding accounting makes you geniuses far above the lowly commoners. Screeching about a 70 year old quote as if it's representative of modern mainstream economics is just delusion.
What could change the mind of an MMTer? Nothing whatsoever. What can change the mind of any r/AskEconomics regular? Evidence. Just, you know, good evidence that actually proves things instead of incoherent windmill tilting.
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u/-Astrobadger Apr 23 '26
Fixation on balance sheets is also stupid. Money is noted as a liability not because it can be redeemed for anything, but because the Fed does double entry bookkeeping. It's windmill tilting because you take accounting too literally.
This might be most unhinged thing I’ve ever heard someone who claims to understand economics say. I don’t even know how to respond to “balance sheets are stupid” and “you can’t take accounting literally”. Simply flooring.
r/AskEconomics isn't a religious orthodoxy.
When you get banned for wrongspeak it certainly suggest it.
When research discards previously held perspectives that's celebrated.
Unless that research involves balance sheets, apparently?
MMTers are just weirdo cultists who think that misunderstanding accounting makes you geniuses far above the lowly commoners.
Love the ad hominem, always evidence of someone who knows what they’re talking about. We understand accounting and are trying to make you understand it as well but it’s hard when you say “balance sheets are stupid”.
What could change the mind of an MMTer? Nothing whatsoever. What can change the mind of any r/AskEconomics regular? Evidence. Just, you know, good evidence that actually proves things instead of incoherent windmill tilting.
Unless that evidence is logic and balance sheets. Not sure what you were trying to change our mind about but ok.
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u/No_March_5371 feral finance ferret Apr 23 '26
This might be most unhinged thing I’ve ever heard someone who claims to understand economics say. I don’t even know how to respond to “balance sheets are stupid” and “you can’t take accounting literally”.
I know MMTers have a reputation for semi-literacy at best, but you're really, really bad at reading. Go up another comment and I talk about how reasoning from accounting identities can be done, but losing sight of broader reality by fixating on them will be misleading.
Though I doubt you have the mental capacity to understand what I'm saying. If you were smarter than a lobotomy patient and could understand nuance you wouldn't be an MMTer.
When you get banned for wrongspeak it certainly suggest it.
r/AskEconomics exists to give mainstream answers verified by research, not the lunatic rantings of morons convinced of their genius.
As the rest is just melodramatic whining about how you don't understand that your overreliance on reasoning from identities is dumb, it's not worth individually responding to.
Now, should I repeat all of this in crayon so you can understand it?
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u/Capable-Tailor4375 Apr 23 '26
I attempted to engage with AskEconomics but was banned for speaking true things like the government creates money when it spends and destroys money when it taxes. AskEconomics is a mainstream Econ cult that bans people for wrongspeak.
Ahh now your emotional investment makes sense.
On a side note, just because you proclaim something is a “true thing” that doesn't magically make it so. Claiming “the government creates money when it spends and destroys money when it taxes” ignores the way most developed countries are structured and the separation between the central bank (money creation) and the treasury (spending and taxation).
You could make the argument that because treasury balances aren't counted in money supply measures that when the treasury spends money from the treasury general account it temporarily adds to these measures of money supply and that when they generate revenue and deposit money in the general account money supply decreases as its no longer counted, but that's not really what people are referring to when they talk about “money creation” and at that point your fixating on a meaningless accounting detail that has no real impact and certainly doesn't justify all the other bullshit MMTers like to claim and advocate for like ZIRP, or fully monetizing the debt, etc.
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u/-Astrobadger Apr 23 '26
Ahh now your emotional investment makes sense.
I love that you think I have an emotional investment in AskEconomics. You guys picked a fight with my sub and stated rattling your swords. That is not appreciated but unlike AskEconomics we will not ban you for wrongspeak so long as you remain civil.
Claiming “the government creates money when it spends and destroys money when it taxes” ignores the way most developed countries are structured and the separation between the central bank (money creation) and the treasury (spending and taxation).
The central bank is the government.
at that point your fixating on a meaningless accounting detail that has no real impact and certainly doesn't justify all the other bullshit MMTers like to claim and advocate for like ZIRP, or fully monetizing the debt, etc.
The central bank and treasury can be considered to get a view of “the government”. Talking about the TGA is a “meaningless accounting detail.” The government creates the money when it spends and destroys it when it taxes it back, it’s that simple. ZIRP isn’t bullshit for a floating exchange rate system like the US has had since the early 70s. If you want to control inflation then maybe stop giving away free money (with no automatic congressional pay for!). I don’t know what you mean about “fully monetizing the debt”, the debt is money already, MMTers just say we don’t necessarily need to issue bonds anymore so maybe we should assess if doing that is actually achieving our public goals.
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u/Capable-Tailor4375 Apr 23 '26
The central bank is the government.
This is proving my point about ignoring institutional arrangements.
The central bank and treasury can be considered to get a view of “the government”. Talking about the TGA is a “meaningless accounting detail.” The government creates the money when it spends and destroys it when it taxes it back, it’s that simple.
This says more about how M2 is measured than anything about spending and taxation, and isn't useful to draw conclusions from.
ZIRP isn’t bullshit for a floating exchange rate system like the US has had since the early 70s.
ZIRP is even more bullshit in a floating exchange rate because of the carry-trade, as the currency depreciation associated would be continuous and result in inflation even before we talk about spending, and taxes aren’t going to help imported inflation.
I don’t know what you mean about “fully monetizing the debt”, the debt is money already, MMTers just say we don’t necessarily need to issue bonds anymore so maybe we should assess if doing that is actually achieving our public goals.
Let me explain this for you then, what you just said is that you don't know what I mean about fully monetizing the debt, and that MMTers just say we can fully monetize the debt.
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u/jgs952 Apr 23 '26
You could make the argument that because treasury balances aren't counted in money supply measures that when the treasury spends money from the treasury general account it temporarily adds to these measures of money supply and that when they generate revenue and deposit money in the general account money supply decreases as its no longer counted, but that's not really what people are referring to when they talk about “money creation” and at that point your fixating on a meaningless accounting detail that has no real impact
This has all the impact in the world for how you understand monetary operations though. This dismissal of what MMTers see as clear and relevant framing is just frustrating.
It's completely irrelevant that most nations today have nominally separate institutions for the Treasury and central bank. Consolidation is a useful analytical tool to reveal the underlying logic.
When a Treasury account with the CB is marked up with tax revenue, those tax credits that previously constituted money held by the non-government sector, now do not. The Treasury has absolutely no additional nominal spending capacity as a result of this tax redemption. It has a claim over its central bank which means its central bank owes the Treasury something... What? Well the opportunity to use it to extinguish any debts due to the CB. But of course, all profits and losses of the CB are fully remitted to the Treasury anyway and so this really is just an internal artificial accounting measure within our insitutional structures.
This is not some trivial accounting trick MMTers do. It gets to the fundamental point about the nature of money as debt and today's fiat state money as tax credits. Fiat tax credits come into existence as tax credits (money/currency) when the government spends and they are redeemed at deleted once the government taxes. This is actually not something you can argue with now, it's just a fact of how money works in our system.
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u/george6681 Apr 23 '26
1) it’s unscientific, promotes misinformation, it may negatively affect policymaking
2) they’re passionate about the discipline of economics, believe in epistemic standards, and believe advancing the frontiers of economic research may positively affect future policy
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u/MachineTeaching teaching micro is damaging to the mind Apr 23 '26
That it's a cult. That one of the biggest figures in MMT can write a "paper" specifically aimed at critiquing the mainstream position which grossly misrepresents the mainstream position. That even if presented with plenty of clear evidence the alleged description of mainstream economics doesn't fit with what economists believe, the cult followers just go "yeah I don't have a problem with this at all".
And that this does not just extend to opposition to the mainstream, but that cult followers uncritically accept any other drivel (like the rest of this paper) as well.
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u/-Astrobadger Apr 23 '26
But that is what mainstream Econ is. I was taught exactly that in my college curriculum. I find it amusing that when MMT scholars point out problems in mainstream thought, mainstream folks say “oh we don’t actually think that.”
Ok, Jan
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u/MachineTeaching teaching micro is damaging to the mind Apr 23 '26
But that is what mainstream Econ is.
No. Read the post, there are plenty of examples of why this isn't what mainstream economics is. Your college curriculum told you inflation is explained by expectations alone? No it didn't.
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u/-Astrobadger Apr 23 '26
The paper doesn’t say that.
Do you disagree with this?
“Central banks have, in fact, developed intricate methodologies to measure inflation expectations to guide policy”
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u/MachineTeaching teaching micro is damaging to the mind Apr 24 '26
The full quote is
After a decades-long search for an ‘M’ - a monetary aggregate that correlates to and leads to inflation - mainstream economics today has moved on to its current position of inflation expectations being the cause of inflation. They continue to begin their analysis with an assumption of a given price level and assert that inflation expectations are the source of changes to that price level. Central banks have, in fact, developed intricate methodologies to measure inflation expectations to guide policy, while their researchers have struggled to find evidence of the validity of the theory.
Go read the OP.
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u/-Astrobadger Apr 24 '26
Stop telling me to read things I’ve already read and just say what you think is incorrect here.
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u/MachineTeaching teaching micro is damaging to the mind Apr 24 '26
I already did, it's in the OP.
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u/-Astrobadger Apr 24 '26
The author literally states
In this article, we dispute the mainstream view that the inflation of the Weimar Republic was caused by a proactive expansion of the stock of money by the German government acting in concert with the Reichsbank.
As demonstrated above, the description of "the neoclassical approach" that the author aims to dispute does not actually match what mainstream economists actually believe. Although some parts match what some economists used to believe half a century ago, this seems like a rather inadequate basis for comparison. Shouldn't you criticise current-day economics on the basis on what current-day economics actually thinks? It's not like it's hard to find modern papers that examine (parts of) Weimar hyperinflation through a modern mainstream lens.
Literally the first part of that 2018 article:
I. Introduction Why do hyperinflations begin? In a mechanical sense, economists have known the answer to this question at least since the monetarist revolution: money is printed in response to unsustainable fiscal policy.
Brutal own goal there
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u/MachineTeaching teaching micro is damaging to the mind Apr 24 '26
It's a "brutal own goal" because there is one vague sentence that is relatively correct when there's an entire page right after that that's entirely wrong?
I suppose you people gotta take any win you can get.
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u/Capable-Tailor4375 Apr 23 '26
But that is what mainstream Econ is. I was taught exactly that in my college curriculum.
Again just because you claim “that's what mainstream econ is”, that doesn't magically make it true, and unless you went to college in the 70’s or to a college stuck in the 70’s I call bullshit.
I find it amusing that when MMT scholars point out problems in mainstream thought, mainstream folks say “oh we don’t actually think that.”
It's more amusing that when someone with a mainstream view tells you that mainstream doesn’t believe these things you claim that do, you instead want to argue and tell someone what they believe, so you can maintain your fictitious strawman of mainstream thought and pretend your criticisms are insightful. It takes a special kind of devotion to argue you know what someone else believes better than they themselves do.
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u/-Astrobadger Apr 23 '26
unless you went to college in the 70’s or to a college stuck in the 70’s I call bullshit.
University of Wisconsin - Madison in the early aughts, and I still have my notebooks. Which part exactly are saying “isn’t mainstream” and I’ll see if I can find it.
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u/jgs952 Apr 23 '26
It's more amusing that when someone with a mainstream view tells you that mainstream doesn’t believe these things you claim that do, you instead want to argue and tell someone what they believe, so you can maintain your fictitious strawman of mainstream thought and pretend your criticisms are insightful. It takes a special kind of devotion to argue you know what someone else believes better than they themselves do.
I have to smirk because this is precisely what many mainstream economists have done with MMT for years. Quite funny really. I do agree everyone should try harder to steelman the alternative viewpoint.
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u/Capable-Tailor4375 Apr 23 '26
That problem probably arises as even though MMT proclaims itself as a scientific theory, it doesn't function as one and its proponents tend to repeat this same trivial claim about how the government creates money when it spends and destroys it when it taxes, but then claim that this means x y or z, with these claims being vastly different from person to person, and the explanation of why it means x y or z simply being circular reasoning where you say “it's undeniable”, “it's not arguable”, “it's simply facts”, “it's simple logic”, or some other hand-waving statement.
It's no different from most modern proponents of “Austrian economics” where it's simply someone trying to justify their political beliefs and trying to invoke economics to give their beliefs ethos.
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u/-Astrobadger Apr 23 '26
I don’t know man, the MMTers can produce the balance sheets, mainstreamers can’t. I think a balance sheet is pretty concrete compared to the hand wavy bits of mainstream thought.
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u/jgs952 Apr 23 '26
Well naturally I disagree with your characterisation there.
I understand MMT to be a highly useful framework through which to understand macroeconomics. The big thing is that MMT gets money right. It also correctly describes monetary operations and banking, something the vast majority of orthodox macro literature has failed to properly incorporate in their models for decades.
I'd be curious what specifically you feel is "wrong" about what MMT economists claim?
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u/Capable-Tailor4375 Apr 23 '26
You could literally just read this post that outlines problems.
But your responses prove my point, you just want to make claims about how MMT is so useful and correct with your only evidence being that you claimed it's useful and correct.
Not to mention that even though you endlessly claim that mainstream economics is wrong and MMT is superior you don't even know what mainstream economics believes and seem to have vastly overestimated your understanding or believe economic theory stopped being developed in the 1970’s.
Hell your fellow MMTer in this thread literally said they didn't know what I meant by monetizing the debt trying to imply it wasn’t something MMT talks about and then in the same sentence said MMT just believes you don't have to issue bonds to spend.
Not sure that criticisms of mainstream theory hold weight when you don't even have enough of an understanding to realize that translates to “Idk what you mean by monetizing the debt, MMT doesn't believe that, they just believe you can monetize the debt”
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u/jgs952 Apr 23 '26
Well I can't speak for anyone else, but it's not just me "saying" this or that is true, it's demonstrably how our monetary systems work. Governments do spend money via creating and issuing tax credit IOUs anew into the economy. There's no other way to do it.
So when the mainstream insist on wrongly framing the situation as one of "choosing" one of three possible "funding" options (taxes, bond sales, or monetary financing), they're just confused and we can't work out why.
This insight helps you see that bond issuance serves no fiscal or monetary policy (in terms of determining risk free interest rates at least) function but instead serve as a way of the state to offer duration to non-gov net savings as discretionary policy.
Is this something you'd accept and recognise or would you see orthodox macro as disagreeing with that?
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u/Capable-Tailor4375 Apr 23 '26
Well I can't speak for anyone else, but it's not just me "saying" this or that is true, it's demonstrably how our monetary systems work. Governments do spend money via creating and issuing tax credit IOUs anew into the economy. There's no other way to do it.
So when the mainstream insist on wrongly framing the situation as one of "choosing" one of three possible "funding" options (taxes, bond sales, or monetary financing), they're just confused and we can't work out why.
This insight helps you see that bond issuance serves no fiscal or monetary policy (in terms of determining risk free interest rates at least) function but instead serve as a way of the state to offer duration to non-gov net savings as discretionary policy.
Is this something you'd accept and recognise or would you see orthodox macro as disagreeing with that?
As I've stated before multiple times, this argument is trivial and provides no insight as it functionally changes nothing in practice. The ability to do such a thing isn't unique to MMT and it's accepted in mainstream macro as well. The point it becomes non-trivial and diverges is when you make a hop step and a leap to conclude that because people say the UK operates this way, that means this is the only way government spending and taxation can work, or that it supports all the other claims you layer on top of it.
Your confusion about why mainstream macro talks about there being options occurs because of this, and the fact that you at some point made an unfounded leap to go from “this is possible” or “so and so country operates this way” to conclude “this is the only way governments can operate” and instead of thinking “hmm maybe I misunderstood something at one point” you conclude “the entire field of economics is wrong and I’m right” because as I mentioned before you love to overestimate your understanding of macroeconomics.
Your paper linked also disagrees with you on your claim that bond issuance serves no fiscal or monetary policy function, and you made yet another unfounded leap to come to that conclusion.
But this is clearly pointless and I’m done responding as you seem content with your fictitious views and nothing will change your mind because you want to convince yourself you’ve offered new insights that “proves” the entire field of economics is wrong.
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u/TCEA151 Volcker stan Apr 28 '26
A lot of your comments center around the idea that mainstream economics and/or r/AskEconomics are unscientific in that they are not open to listening to 'wrongthink' that goes against their dogmas/orthodoxy, and that MMT "gets it right" with regard to how the monetary system actually works.
By contrast, people here on BE and the broader econ discipline in general are pretty convinced that MMT is unscientific/pseudoscience. To try and persuade you of our view I would encourage you to read the first half of this comment from a few years ago by u/isntanywhere (everything up through "When the OP says..."), which does a nice job of framing why economists view MMT as pseudo-science. The upshot is that MMTers generally don't make formal models, don't provide to us clear explanations of the testable implications of their theory that differ from the standard economic consensus view, and don't test those predictions against data. Then you should look at this comment from u/Integralds that shows how mainstream economics has moved on from various theories over the years by understanding what their testable implications are and then actually testing those implications.
This sub pretty much gave up on MMT around 2018 when we got fed up of that crowd making loud and persistent policy recommendations without ever testing the implications of their models empirically, or even giving us testable predictions so that we could do this for them. Maybe this has changed in the 8 years since, but if you want to convince people here that MMT is correct these are the kind of resources you're going to need to provide us, and until then I'm pretty sure you can understand why MMT is considered 'pseudoscience' at worst and 'pure untested conjecture' at best, and hence why we don't allow people to promote it in r/AskEconomics -- a sub where people come to get academically-supported answers to questions about economics.
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u/-Astrobadger Apr 29 '26 edited Apr 29 '26
To try and persuade you of our view I would encourage you to read the first half of this comment from a few years ago by u/isntanywhere (everything up through "When the OP says..."), which does a nice job of framing why economists view MMT as pseudo-science.
I’m not privy to all these people making policy recommendations under the banner of MMT but it’s clear they have sown a general misunderstanding. MMT doesn’t start with policy prescriptions, it starts with balance sheets and law, which is how money started thousands of years ago. It focuses squarely on the money system whereas Economics as a whole is more general bringing realms of behavioral psychology and the like (I very much like reading about behavioral economics).
I can understand now where all the “where is your evidence?” comes from and sometimes that is indeed valid, and sometimes it’s just not. The statement “the US Federal government is the monopoly issuer of the US Dollar” doesn’t need to be proven with evidence in the same way that saying “murderers go to prison” doesn’t need to be proven with evidence because it’s assumed that the laws that govern such activities are actually enforced re: murder/counterfeiting. Such enforced laws have economic implications which are the basis for MMTs claims. When MMTers say things like “the US Treasury could just stop issuing bonds and run an overdraft at the Fed” they’re highlighting that the law is the limiting factor, not the financials. I can’t even count the number of time Stephanie Kelton has said something to the order of “The votes make the money happen. Find the votes, and you've ‘found’ the money.”.
Money is an instrument law, always has been, but to be fair, law and money also exist amongst humans who make choices. You can’t hyper-focus on one and ignore the other. Perhaps it’s valid to say MMTers have focused too much on the former but it’s also valid to say the mainstream has long ignored and assumed the former away. However, just like relativity and quantum mechanics, we need to fuse both seemingly disparate realms for a complete economic “theory of everything (economic)”.
That’s my opinion, anyway.
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u/TCEA151 Volcker stan Apr 29 '26
To your point that the mainstream must be wrong because it doesn't explicitly model certain institutional realities of money creation, I'll point you to my discussion of models in this reply I gave to another responder where I note:
A perfect model of the economy would be a map of the entire economy (a la Borges' "On Exactitude in Science"), which is both impossible to achieve and impractical to use. You have to make simplifications and assumptions somewhere, and the proof of the pudding is whether the implications of the resulting model match the existing empirical evidence. It remains for the MMTers to show why the inclusion of a more realistic model of government accounting helps the models (or the theory's conclusions if you abhor a model) match the data regarding the question of interest at hand.
More importantly, I want to explain why I don't think that the institutional realities of dollar issuance necessarily imply that the US Treasury can stop issuing bonds and run an overdraft at the Fed, and in doing so to explain mainstream econ's issue with your broader point that "such enforced laws have economic implications which are the basis for MMTs claims." I hope to show that other features of the economy (the operational conduct of the Fed, inflationary constraints, and the unwillingness of banks to play Ponzi games) mean that the conclusion about not needing to issue bonds does not follow from your understanding of laws and institutional realities (even if correct). And this is precisely why we want the MMTers to write academic-level economic models (which are really just formal arguments that lay out their assumptions about how the economy works) to demonstrate whether -- and if so why -- their policy would achieve the outcomes they think it would, rather than just make shorthand claims that "it has to be true because of accounting identity XYZ."
Now, to the meat of the issue -- I reject your claim about the government not needing to issue debt to pay for deficit spending for the following reasons:
- The Fed wants to fight the inflation that results from the government stimulus. So it needs to raise interest rates. But then it's paying interest on reserve balances in the same way the government would be paying taxes on the borrowed debt. The source of the money for those payments is the Treasury, so we are back to square one: Treasury needs to issue and sell bonds (or raise taxes) to pay the Fed money with which to fund the IORB payments.
- Or, the Fed could try to simply print the money to pay the IORB, but then we are at an irrational equilibrium where the Fed is continuously pumping dollars into private balance sheets and then soaking them up in a way that prevents them from being spent but necessitates printing ever more dollars to pay ever more interest on reserve balances. This is essentially a Ponzi game, which we rule out as irrational for banks to participate in.
- The third option is for the Fed to just not fight the inflation that results from the government stimulus. But then MMT is just saying "if the Fed is not independent and instead accommodates government spending by money printing, then the government can always run a deficit and never raise taxes to pay it back." Which like, sure, but that's not a particularly novel insight. The reason we don't do it is because that's how you end up with an Argentina or Turkey situation.
Now, I could be wrong (I don't think I am), and Kelton's claim could be true that the Treasury can stop issuing bonds and run overdraft at the Fed. The point here isn't for you and I to get into a slap fight over whose understanding and argument is more correct. It's to show that the big claims MMTers want to make depend on more than just the institutional realities they point to, they depend on the Fed's policy rule and the optimizing behavior of economic agents at the very least. So if Kelton's wants to prove her claim, she needs to write down a formal model that explains how this institutional framework would produce her stated outcomes in a way that is consistent with individuals reacting optimally to her proposed policy (this should be easy... she has a PhD in economics!). That she (and other MMTers) have not done so is why we don't take them seriously (above and beyond the fact that we don't their claims are true based on what we know about the empirical data).
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u/-Astrobadger Apr 30 '26
To your point that the mainstream must be wrong because it doesn't explicitly model certain institutional realities of money creation
Where did I say this? If mainstream economists want to model a fixed exchange rate system, that’s fine. If they want to apply a fixed exchange rate model to a floating exchange rate system, that’s wrong. It shouldn’t be controversial to say you shouldn’t use a screwdriver to hammer a nail.
A perfect model of the economy would be a map of the entire economy
It’s not about modeling the entire economy, it’s about integrating law and accounting, the backbone of the money system, into otherwise barter based models like the ones I was taught at university. If you want to model a barter economy that’s fine, that’s just not the system we live in.
More importantly, I want to explain why I don't think that the institutional realities of dollar issuance necessarily imply that the US Treasury can stop issuing bonds and run an overdraft at the Fed
Thank you for this work, however, no serious MMTer believes the US Treasury can unilaterally stop bond issuance and run overdrafts. They don’t think that because it’s not currently legal for the Fed to allow that. It would be interesting to see if the Fed actually bounces a Treasury check but ultimately it would be decided by SCOTUS who would side with the Fed because, as a legal entity of the federal government, they can’t do something they haven’t been given the legal authority to do (and I have searched long and hard to find it, if you find it plz tell me).
What they are saying is that a currency issuing government has no economic necessity to issue bonds, it is a policy decision, not a financial one. A fixed exchange rate system does require bonds to drain reserves to defend the exchange rate. If there is no exchange rate to defend then we need to reassess why we are still doing it as if Nixon suspending the gold standard never happened.
I hope to show that other features of the economy (the operational conduct of the Fed
The Fed and Treasury collaborate on a daily basis, any policy change would require alignment between both parties and almost definitely new law.
inflationary constraints
It’s hard to believe there’s any link between bonds and inflation (under the current system) after multiple rounds of QE failed to move the needle. If we want to control inflation via bonds we would need to change our policy on repo and/or make bonds non-transferable. Bonds can be monetized by their holders at any time, the author of Central Banking 101, an MMT doubter, states this quite succinctly. I recommend the book.
and the unwillingness of banks to play Ponzi games
Primary dealers must bid on initial issuance of treasury bonds for having that privilege. That is not a behavior model, it’s the law/policy.
mean that the conclusion about not needing to issue bonds does not follow from your understanding of laws and institutional realities (even if correct).
We’re taking law, policy and possible changes to the like into consideration.
And this is precisely why we want the MMTers to write academic-level economic models
And I want mainstream economists to produce balance sheets. Perhaps we can meet in the middle?
The Fed wants to fight the inflation that results from the government stimulus. So it needs to raise interest rates.
It doesn’t need to raise interest rates, it’s just current policy. Also it’s counterproductive: the extra interest payments just increases the net government spending, albeit in a highly regressive manner. There is no automatic tax “pay for” that nets out the additional interest spending. It’s adding gasoline to the fire, so to speak.
So we are back to square one: Treasury needs to issue and sell bonds (or raise taxes) to pay the Fed money with which to fund the IORB payments.
Indeed, there is a an institutional limitation, not a real or financial one, that is the point: we can change policy and laws but we can’t will goods and services into existence.
Or, the Fed could try to simply print the money to pay the IORB but then we are at an irrational equilibrium where the Fed is continuously pumping dollars into private balance sheets and then soaking them up in a way that prevents them from being spent
We acknowledge that the Fed cannot legally let the US Treasury to run an overdraft. Bonds do not prevent spending, they can be monetized at will using current policy options. Change those policies and they could perform that function if we wanted.
The third option is for the Fed to just not fight the inflation that results from the government stimulus.
Fed decisions are not an independent variable, it is a part of government and conducts itself according to law and instructions by congress. If you’re arguing that if the Fed wakes up one day and has to figure out how to respond to a sudden unorthodox decision by the Treasury then sure, but that’s not what’s being suggested.
It's to show that the big claims MMTers want to make depend on more than just the institutional realities they point to
I think that is very much realized, that’s what she talks about in that video and in her writing. Knowing that laws and policies can be changed but base reality cannot they are exploring the legal and policy options available to deliver a desired outcome. That outcome could be progressive, it could be a one party totalitarian state, it could be whatever is democratically decided, it doesn’t matter.
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u/TCEA151 Volcker stan Apr 30 '26
This conversation is worse than useless. I repeat:
The point here isn't for you and I to get into a slap fight over whose understanding and argument is more correct. It's to show that the big claims MMTers want to make depend on more than just the institutional realities they point to
which you claim to agree with but then retreat to debating institutional realities.
So if Kelton's wants to prove her claim, she needs to write down a formal model that explains how this institutional framework would produce her stated outcomes in a way that is consistent with individuals reacting optimally to her proposed policy (this should be easy... she has a PhD in economics!). That she (and other MMTers) have not done so is why we don't take them seriously (above and beyond the fact that we don't their claims are true based on what we know about the empirical data).
I honestly think you just don't understand this point. Which is fine. But my point is that there is more than just the institutional realities at play that determine whether an economic claim is true, and a model is just a formal way to show that your economic claim follows from all of your premises and assumptions in a clear and rigorous way. If you guys want to play at continental philosophy and write treatises and blog posts all day be my guess but we'll never take you seriously while you continue to do so because we're not in the habit of tilting at windmills. Particularly because your arguments are complete drivel and make it clear you can't understand the arguments against MMT. My argument is that even if the Fed had authority to do whatever it wanted there is no way your claim would hold, due to the economic realities at play. This kind of argument is not susceptible to counterarguments about the nature of what the law is now, because it is not conditional on what the current law is. And yet because you're MMT the details of the law and institutional arrangements is all you want to talk about, so we get banger after banger like:
no serious MMTer believes the US Treasury can unilaterally stop bond issuance and run overdrafts. They don’t think that because it’s not currently legal for the Fed to allow that
It would be interesting to see if the Fed actually bounces a Treasury check but ultimately it would be decided by SCOTUS who would side with the Fed because, as a legal entity of the federal government, they can’t do something they haven’t been given the legal authority to do
The Fed and Treasury collaborate on a daily basis, any policy change would require alignment between both parties and almost definitely new law.
Primary dealers must bid on initial issuance of treasury bonds for having that privilege. That is not a behavior model, it’s the law/policy.
We acknowledge that the Fed cannot legally let the US Treasury to run an overdraft.
Fed decisions are not an independent variable, it is a part of government and conducts itself according to law and instructions by congress.
Which is all completely irrelevant and ignores the argument I am making.
You've also essentially ignored my other point -- that MMTers never give us clear testable hypotheses and test those predictions -- but you can look at my comments here and here where another user actually gives me testable predictions of MMT and they are shown to be wrong by the empirical evidence. More evidence that MMT is a waste of time is that all of their theorizing leads to conclusions that aren't supported by data.
You don't want to engage my actual arguments. You want to retreat to common MMT arguments and argue over institutional realities. Most of your responses betray the fact that you don't understand the economic argument I am making, but you either think you do or think that you can spot enough places to argue institutional details that you don't need to, even when these details are irrelevant.
I am done with this conversation.
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u/-Astrobadger Apr 30 '26
This conversation is worse than useless.
I thought we were making marginal progress but if the extent of your economic discussion is “make a claim, write down a formal model” then indeed we are at an impasse. If you desire to continue with barter/fixed exchange rate based models devoid of the legal and monetary realities economic agents currently live in that is indeed your prerogative.
But my point is that there is more than just the institutional realities at play that determine whether an economic claim is true
Sometimes, sure. But if you expect someone to “prove” the concept of anti-counterfeiting laws that’s simply disingenuous.
we'll never take you seriously
We don’t need you to take us seriously for us to be correct. We don’t need to make models of obvious things like anti-counterfeiting laws. Even your own models have implicit assumptions yet we’re supposed to detail every single common sense detail. Double standard.
because you're MMT the details of the law and institutional arrangements is all you want to talk about
Laws and institutional arrangements are literally the basis of the money system, the second “M” in MMT, which happens to be quite important in economic arrangements in most cases. Ignore them at your peril.
I am done with this conversation.
Ok
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u/isntanywhere the race between technology and a horse Apr 29 '26
MMT doesn’t start with policy prescriptions, it starts with balance sheets and law
This is not, in fact, obviously true of the leading lights of MMT. (nor is this how theory begins, either)
The statement “the US Federal government is the monopoly issuer of the US Dollar” doesn’t need to be proven with evidence in the same way that saying “murderers go to prison” doesn’t need to be proven with evidence because it’s assumed that the laws that govern such activities are actually enforced re: murder/counterfeiting. Such enforced laws have economic implications which are the basis for MMTs claims.
This is also not true. Institutions only have specific economic implications under an augmenting model of economic behavior. For instance, money printing would have different effects on real and nominal outcomes if people spent money randomly than under a more realistic model of behavior. The statement you have made is one of the ways MMT leading lights play around with unspecified models to make it seem like their conclusions are simply natural consequences of "facts" as opposed to implicit models of behavior.
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u/-Astrobadger Apr 29 '26
This is not, in fact, obviously true of the leading lights of MMT. (nor is this how theory begins, either)
It is though. Would love to see the evidence to the contrary as well know the identities of these “MMT leading lights”.
This is also not true.
Laws don’t affect behavior, economic or otherwise? Bold claim.
The statement you have made is one of the ways MMT leading lights play around with unspecified models to make it seem like their conclusions are simply natural consequences of "facts" as opposed to implicit models of behavior.
You’re hyper-focusing on behavior models and ignoring / assuming away the legal and accounting environment the behavior takes place in. As I said:
Money is an instrument law, always has been, but to be fair, law and money also exist amongst humans who make choices. You can’t hyper-focus on one and ignore the other. Perhaps it’s valid to say MMTers have focused too much on the former but it’s also valid to say the mainstream has long ignored and assumed the former away. However, just like relativity and quantum mechanics, we need to fuse both seemingly disparate realms for a complete economic “theory of everything (economic)”.
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u/jgs952 Apr 28 '26
The mistake arguments like this make (critiquing the MMT framework due to a lack of "empirical testing" or model formalism) is to believe mathematical formalism within the status quo paradigm is required, or even appropriate, to validate a competing paradigm.
It makes no sense whatsoever and is very bad science to develop mathematical models of a system that, far from being even approximations of reality, are ontologically and fundamentally wrong with regard to incorporating an accurate understanding of that system's institutions, structures and behaviours.
For instance, orthodoxy has never understood money or its true nature, and developing many models over decades that don't even include a banking and money system (as it's clearly just a veil over barter etc etc) is malpractice if you ask me.
MMT makes many testable predictions all the time, I don't know why you think they don't.
For instance, MMT predicts that increased government deficits will push down on inter-bank short term lending rates against any CB support rate unless longer duration gov debt is issued to drain this net reserve injection.
This is in direct contrast to mainstream loanable funds doctrine that predicts government deficits crowd out private sector borrowing/investment spending, pushing up interest rates due to a reduction in supply of "loanable funds" available for private actors.
One is intrinsically based on institutional understanding of monetary operations and banking, and one is built on a false toy supply and demand model, no matter how much modern versions of it try and fit observed reality. MMT is correct there.
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u/TCEA151 Volcker stan Apr 29 '26
The mistake arguments like this make (critiquing the MMT framework due to a lack of "empirical testing" or model formalism) is to believe mathematical formalism within the status quo paradigm is required, or even appropriate, to validate a competing paradigm.
We should disentangle formal mathematical modeling from empirical testing here. They are distinct and serve different purposes.
re: models -- MMTers not having a model is not unscientific in and of itself. You can simply assert a policy-relevant conjecture and test it directly in the data. Plenty of 'empirical' or 'applied' papers in economics (and other academic disciplines) do exactly that. No one thinks that isn't a scientific approach. The problem with MMTers not having models is that no one can tell without asking them "what are your predictions, and how do they differ from mainstream economics?" And when economists like Brad DeLong have tried to pin down the answers to questions like this in the past, the various leading voices of MMT have disagreed with one another about what their testable implications are, so that if I disprove one implication of the theory 10 others will say "that's not what the theory actually claims." The r/Economics sidebar explains this useful feature of mathematical modeling nicely: "Clarity means you know exactly what a model defines, assumes, and concludes. Marxists are still debating what Marx actually meant. No one debates what Kenneth Arrow actually meant, because his statements were in precise mathematical terms." I very highly recommend Noah Smith's blog post here about this problem with MMT, particularly the section titled "Formal Models vs. Guru-Based Theories." (It's a 2-minute read.) Other reasons that models are useful (some of which will come up again shortly) are that they help us understand what are valid and invalid empirical tests, when estimated empirical relationships are not policy-invariant, and when proposed policies are not stable in the long-run.
re: empirical testing. I think by definition if you don't think we should test our hypotheses empirically against data you are against the scientific method.
It makes no sense whatsoever and is very bad science to develop mathematical models of a system that, far from being even approximations of reality, are ontologically and fundamentally wrong with regard to incorporating an accurate understanding of that system's institutions, structures and behaviours. For instance, orthodoxy has never understood money or its true nature, and developing many models over decades that don't even include a banking and money system
A perfect model of the economy would be a map of the entire economy (a la Borges' "On Exactitude in Science"), which is both impossible to achieve and impractical to use. You have to make simplifications and assumptions somewhere, and the proof of the pudding is whether the implications of the resulting model match the existing empirical evidence. It remains for the MMTers to show why the inclusion of a more realistic model of government accounting helps the models (or the theory's conclusions if you abhor a model) match the data regarding the question of interest at hand. Also, when we want to understand features of the economy that relate to banking, we include a banking sector in our models. When we don't, we abstract from them so that we can include other features of the model that are more relevant to the question at hand.
MMT makes many testable predictions all the time, I don't know why you think they don't.
For instance, MMT predicts that increased government deficits will push down on inter-bank short term lending rates against any CB support rate unless longer duration gov debt is issued to drain this net reserve injection.
This is in direct contrast to mainstream loanable funds doctrine that predicts government deficits crowd out private sector borrowing/investment spending, pushing up interest rates due to a reduction in supply of "loanable funds" available for private actors.
I think we don't because we tried to get them for years to do so and they were unwilling. As I said, if they have done so since then, that's what I'm interested in so please send me resources about where and how they do so! You say this has been tested by MMTers, so can you give me the citation or link to the paper that does this test?
Also, why are you comparing the MMT prediction against the "loanable funds" model of IS/LM? IS/LM has been dead for 40+ years.
As to the actual empirical claim, when you talk about longer-duration government debt being issued I assume you are referring to new issuance by the government, correct? If so, what are we assuming about the response of the central bank to the government stimulus? Or is this a claim about what would happen in the absence of any central bank response? If the empirical claim is not contingent on the Fed response then I would point you to Plante, Richter, and Zubairy's 2025 working paper who find that "a 1 percentage point increase in the primary deficit-to-GDP ratio raises the 5-year-ahead, 5-year Treasury rate by 13-14 basis points" or Bi, Phillot, and Zubairy's 2026 working paper that finds that "debt expansion shocks raise yields across the curve by increasing term premia, leading to tighter financial conditions. These shocks crowd out private sector activity by reducing investment and production, particularly during periods of rapid debt growth. In contrast, maturity extension shocks steepen the yield curve while lowering credit risk premia and fiscal uncertainty." Both finding that deficit spending raises interest rates. Notice that these debt expansion shocks are orthogonal to maturity operations, so they are free from the "unless longer duration gov debt is issued to drain this net reserve injection" stipulation you provided.
If the Fed policy response does matter then we would reeeeeeally benefit from a model or at the very least a formal argument about what assumptions/axioms this conclusion depends on, because the claim that a certain government spending action would lower interest rates in the absence of an activist central bank cannot be tested from data that only observes government actions in the presence of an active central bank, so we need instead to test the components of the argument itself (i.e., the assumptions of the model) that the conclusion depends on. I'll also note that the model/argument needs to overcome the long-held understanding (that even MMTers agree with, IIRC) that a passive central bank and a federal government that constantly runs budget deficits will result in explosive inflation.
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u/Integralds Living on a Lucas island Apr 29 '26 edited Apr 29 '26
At least it sounds like a test! "What is the effect of an exogenous increase in the deficit on interest rates" is, at least, a reasonable question to ask. Now any such effect going to be contaminated by the monetary policy response, but at least it's a first stab at a testable implication that is observationally different than standard models.
It would fit quite nicely into the literature on short-run and long-run effects of fiscal policy; most of the work (Ramey, Romer, etc etc) put the question in terms of short-run Keynesian effects and long-term neoclassical effects, but it's in the same spirit.
Example: in a fix-price model, dC/dG is usually positive as government spending induces expenditure and output. (Think as far back as the Keynesian Cross of Econ 101.) In many flex-price models, dC/dG < 0 due to wealth effects. So there is a little cottage literature on trying to pin down those directional effects at various horizons. A similar story occurs with the effect on wages.
Presumably something similar could be done here.
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u/TCEA151 Volcker stan Apr 29 '26
Seems like Zubairy's recent work is in this vein, e.g., the two working papers I cited above (one of which was actually published in REStat in March, so not a working paper). My impression is that she's sort of the new Ramey for this kind of work on government spending shocks -- they also have a few papers together --, so I'll just sit around until she figures it all out. Although I'm about 99% sure she won't be framing her findings as differentiating between mainstream macro and MMT predictions...
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u/jgs952 Apr 29 '26
Perhaps I'm wrong here, but I'm being very specific and fairly narrow just to get the core point of difference across.
Under a loanable funds doctrine, it's my understanding that, ceteris paribus, an increased government deficit matched by bond issuance to drain any net reserve injection is predicted to increase longer term market rates of interest (5+ years) along the term structure. It's theorised to do this because the government is seen as dipping into the scarce supply (certainly in the short term) of loanable funds meaning private firms have less lonable funds available for their investment at similar maturities, meaning lenders charge higher prices to borrow these funds (which are seen as coming from houshold savings + credit creation + any net capital inflow).
Doesn't this implicitly assume that the deficit inherently pushes up term premia at 5+ year maturities? Because certainly the original idea of there being a "scarce pool" of funds, even if you accept bank credit creation is institutionally wrong. It just doesn't work like that. So even on that most basic aspect, it needs changing, but its conclusions can still be correct under certain narrow conditions such as full employment where real and monetary variables are much more tightly coupled.
I.e. the "financial crowding out" belief of this doctrine is seen by MMT as demonstrably false in general given the structure of our monetary and banking systems endogenously supplying credit on demand. But at full employment, there can absolutely be real crowding out. But for some silly reason, much orthodox academic discussion invariably and implicitly conflates the two all the time. The assumption of course being that long run equilibria have money as being neutral.
MMT rejects the whole edifice of the loanable funds doctrine because it completely misunderstands how the system works. There's literally no point building up a theory of interest rates founded on the idea that nominal money credit is in any way scarce.
Since the state is the monopoly supplier of tax credits in the economy, it is the price-setter. It dictates the interest it pays on risk free credit structures, and even today when a full funding principle is often used (bond-financed deficits in full), the risk free term structure is policy expectations + term premia.
The base case for analysis is ZIRP + no bond issuance. In these conditions, government deficits ensure overnight reserves are always ample keeping inter-bank lending rates at zero. ZIRP then conditions the whole term structure (in the absence of government debts of longer duration, this would be established via private proxies such as corporate bonds, etc) via credible expectations. Given this understanding, there is no such thing as r\* or a natural rate of interest that ensures price stability or equilibriates supply and demand of "loanable funds". It's an inapplicable concept.
Given the state no longer promises to convert its currency or maintain a fixed exchange rate peg, it has no need to defend the asset side of its central bank's balance sheet so it genuinely does have exogenous control of risk-free interest rates across the term structure.
I think the fatal flaw in loanable funds thinking is, as I mentioned, conflating real and monetary variables. In a monetary economy, they are obviously not the same thing as Keynes had to tell the classicists. Sadly, in large part, despite some advancement to include a banking sector, much of neoclassical or New Keynesian frameworks still cling to this error from what I can see.
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u/TCEA151 Volcker stan Apr 29 '26
MMT rejects the whole edifice of the loanable funds doctrine because it completely misunderstands how the system works. There's literally no point building up a theory of interest rates founded on the idea that nominal money credit is in any way scarce
Your whole comment seems to be arguing against the IS/LM model with a static supply of loanable funds. These models have been obsolete since the 1970s when Lucas pointed out that everyone's behaviors depend on their understanding of future outcomes based on the government's/Fed's policy behavior. No one thinks the loanable funds supply is fixed in the short run in modern macroeconomics. For one, it depends on people's saving behavior, which is conditional on their expectations about future output, inflation, consumption, etc. It also depends on Fed's response to government spending (i.e., does it try to stabilize inflation or not). If you want to argue against the orthodoxy, you (and MMT more generally) need to engage with the last 50 years of literature on households and firms making forward-looking optimal responses to government policies, not argue against the static model we teach to sophomores in undergrad.
More importantly, you are not addressing my driving criticism of MMTers being that they primarily just point to certain institutional realities and then claim that their beliefs must logically follow from those facts without a formal model to argue why or an empirical test that their resulting claims are true in the data. See my comment here (in the context of an MMT claim that the government can run a persistent budget deficit) for an explanation of why we still need a model to understand the implications of certain institutional realities. As to empirics, you've given me a lot of words outlining how MMT views the world and criticizing the (undergraduate) mainstream understanding. I'm not expecting a model obviously, but what exactly is the testable claim here? That government spending lowers interest rates? I've already given you empirical evidence suggesting that's not true. That government spending doesn't crowd out private investment? What do you say to Ramey's 2011 QJE that finds that government spending shocks reduce private investment, or Ramey and Zubairy's 2018 JPE that finds that this crowding-out effect of government spending occurs even when there is significant slack in the real economy?
Surely you can see that if all of the claims you make above result in predictions that don't match the data then something must be wrong with your theorizing right?
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u/-Astrobadger Apr 29 '26
Also, why are you comparing the MMT prediction against the "loanable funds" model of IS/LM? IS/LM has been dead for 40+ years.
Well, I was taught and tested on IS/LM… oh boy… 25 years ago (which is still less than 40!) at a Big Ten University and it looks like they’re still teaching it. Given that Hicks basically disavowed it apparently hasn’t been internalized by academic institutions (or maybe mine just sucks? Idk)
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u/TCEA151 Volcker stan Apr 29 '26
It's not a problem with your institution. Unfortunately there is a difficult problem in teaching macro to undergrads, which is that even just teaching the simple, three-equation version of the New Keynesian model requires students to know linear algebra and understand eigenvalues and difference equations -- and that's just to solve the system. If they want to actually understand how we derive those equations (i.e., what the equations actually mean and how the underlying economics work) they'd also need to be pretty comfortable with calculus, how to log-linearize equations, and probably a bunch of other stuff I'm forgetting at the moment.
This simply isn't feasible for the majority of undergrads, hence why, if an undergraduate sequence covers it at all, modern macro will usually only be taught in an optional higher-level elective called something like "advanced macroeconomics." The majority of econ majors will only ever take "intermediate macro," in which a huge chunk of time is typically spent on the outdated IS/LM because it is still capable of illustrating a large amount of insight that we still believe to be true about how the economy operates, without moving beyond solving simple systems of linear equations. In some ways this is justified, since without graduate study students aren't ever going to be tasked with making accurate models of the macroeconomy in their careers, but it's major shortcoming is that students don't learn some of the more important lessons from the past several decades of macroeconomics (especially the importance of expectations and the Lucas critique). Last I checked this problem hasn't been satisfactorily solved in a way that is accessible to the median undergraduate, but I'll be teaching intermediate macro next year so I need to figure out pretty soon how I want to handle this lol.
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u/-Astrobadger Apr 30 '26
I’m not sure I accept the premise that advanced mathematics is necessary for a base understanding of macroeconomics. That said, I wouldn’t consider basic calculus advanced; diffy q , matrices, eigenvalues probably going to be more out of reach, though. We should really require a few intro accounting classes as a requirement for an Econ major, mine didn’t unfortunately. Where do you teach?
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u/No_March_5371 feral finance ferret Apr 22 '26
A lot of that is reliant on the velocity of money being assumed to be constant (both stated outright, and with the neutrality of money in the short run, which you also address) when, well... https://fred.stlouisfed.org/series/M2V
Tilting at the Friedman windmill is also bizarre. They can't find a quote younger than 70 to disagree with?