It's called "kicking the can" and the only reason it looks like a sustainable system is because we haven't hit the end of the runway yet. But now that we're trapped at the zero bound and cannot normalize, the next few years should see the beginning the end of the debt supercycle and the USD as world reserve currency.

When you say "trapped at the zero bound" are you saying the control output is saturated basically? I'm thinking in terms of feedback control loops. I would agree that the FOMC doesn't have a lot of room to work with if we were to enter another downturn but they do have some range left in their controller. During the last downturn they reduced the federal funds rates to 0% and that stayed there for years but they are now back up to 2.4% I think. When dropping rates to 0% wasn't enough in 2008 they also reduced longer term rates by buying Treasury securities (operation twist etc). The ended up adding $4.5T of Treasury securities to their balance sheet by the end of it. They have been unwinding those positions for over a year now but the balance is only slightly less than $4T. So I guess one could say there isn't much left in the accelerator pedal if we need it again. Especially given the recent tax reductions while the economy was already improving. That's just one less tool that can be used for the next time. Hopefully we won't have a next time until the Fed is able to get rates over 5% and the Fed balance sheet under $1T. https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

From a feedback control perspective, it amounts to trying to balance an inherently unstable system. Think of a cart-and-pole apparatus where the top end of the "pole" (that is, the natural rate) is constantly being pushed around by unpredictable, outside shocks, and you have to move the "cart" (the policy rate) in the same direction to make up for those and keep the whole thing from falling over (into hyperinflation or extreme deflation - an illusory "boom" or a very real and persistent "bust"). The zero bound is only a leftwards boundary for the "cart", not the "pole" - but when it's hit, you do need something like QE to push the top end of the "pole" rightwards again independently of the "cart".

(The way out of the mess is to stop trying to use monetary policy to manipulate market interest rates, and to instead shift to a short-term policy target that fosters stability rather than instability. Such as, e.g. the money-price of gold. Or some measure of the money supply. Or the market forecast of nominal incomes x months in the future. There are lots of plausible choices!)

And what exactly does "hitting the end of the runway" entail? Alarmist calls about the economy suddenly running out of resources and an ensuing global collapse have been around for decades. Centuries, really. Remember when we thought that we'd all be fighting over oil by 1995[1]? That sovereign debt is going to collapse? The US at least, has debt figures as a percentage of GDP that are a fraction of plenty of other countries mostly regarded as stable.

I'm going to need more info before I believe someone telling me the end is neigh.

1. https://en.wikipedia.org/wiki/Peak_oil

Please explain what you mean by “trapped at the zero bound”. It can’t possibly mean interest rates.

I think he does mean interest rates, which are not currently at the zero bound, as the fed has raised them several times lately. I think he probably should have written "trapped too close to the zero bound" which would actually make more sense. For instance the last round of interest rate increase look like they caused the markets to get very sick. That puts pressure on the Fed not to do any more raises. However if the Fed does not raise rates and if some nasty down-turn happened at this point then would the fed accomplish much by dropping rates to zero? Another idea here being that if you muck around all the time with interest rates to solve problems the effectiveness of the medicine may wear off, particularly if this medicine has delayed people from making needed structural reform. By structural reform I mean rebuilding the middle class not cutting social security or crap like that. Let me put forward a very radical idea. I suspect we need to actually restrict the amount of debt that people can accumulate as it make the system as a whole incredibly brittle. Think of consumer debt like a sort of "tragedy of the commons" situation. An individuals debt load should be their own business but if just about everyone is loading up on debt then the overall economy could explode which is everyone's business. In addition if a creditor can resell bad debt to other unsuspecting buyers then they have an incentive to give toxic loans and credit cards to people as long as they aren't holding the large amount of toxic debt on their own books for very long.

Yes, sorry I meant interest rates. Maybe a poor choice of words. I wrote another article years ago positing that once you hit zero on interest rates, it's looking like you may never be able to normalize again (see Japan).

We're at 2.4% (In the US) but that's still too low and the Fed is trapped. They can't go higher, they've paused and depending on what happens over the next while, they may very well have to cut.

So I use the phrase trapped at the zero bound because once you actually touch that bound I think you get stuck there.

That old post was: https://www.zerohedge.com/news/2016-01-14/trapped-inside-zer...

Is this not survivorship bias in the flesh?

> Survivorship bias or survival bias is the logical error of concentrating on the people or things that made it past some selection process and overlooking those that did not, typically because of their lack of visibility. This can lead to false conclusions in several different ways. It is a form of selection bias.

Not exactly. Most societies have survived for the last several centuries, at least in a broad sense. If we compare the last century or so, especially the last century since the last conflict since the largest governments, the current economic system has proven to be one that can deliver consistent economic growth without necessitating inter-state violence.

Most prior economic systems have failed to do both of these. Either they didn't have that much capacity for growth (e.g. once you're farming all the arable land, your agrarian kingdom isn't going to be producing much more land), or necessitated violent expansion (only way to get wealthier is to raid or annex somebody else's territory).

Unless we have examples of societies experience consistent economic growth, without any substantial form of expansion of territory or use of state power, then this isn't survivorship bias. It's just a sober analysis of history.

So MMT is terrible because it prints money and will be a catastrophe, but measures like QE are fine because it prints money to bail out the financial sector but isn't that large a catastrophe?

Quantitative Easing was essentially the same thing, to a degree (increasing the money supply). But it was done so with the specific goal in mind, to keep key financial institutions from collapsing. It was also done during a period relatively low inflation, and was done in low enough rates that inflation did not substantially rise.

By comparison, MMT is basically telling the government to use quantitative easing to pay for everything. When you really dig down into it, the proponents of MMT know exactly how deceptive the scheme really is. They fully understand that it's allowing the government to pay for whatever it wants by printing money and letting the populace lose their savings due to larger inflation. And it fails to address immediate shortcomings: namely the fact that people will stop accepting payment in dollars if the government starts rampantly increasing inflation.

I think that's an unfair characterization. For one, doesn't a dollar of QE cause just as much inflation as a dollar of MMT?

MMT doesn't say to ignore inflation - it thinks inflation is a key measure to keep an eye on just like the current system - it just says that taxes and debt bonds should be used as independent control parameters from deficit.

> I think that's an unfair characterization. For one, doesn't a dollar of QE cause just as much inflation as a dollar of MMT?

In theory, yes. In practice, not at all. Recessions are exigent circumstances, and no one was under the impression that the government would continue increasing the supply of money to pay for arbitrary things. Not to mention, the bulk of this quantatitive easing took place during two years were we saw deflation - so increasing the money supply was something the government would have likely done anyway.

By comparison, if the government announced that starting in 2020 it would start paying for everything by printing more money then the first thing that will happen is that smart, wealthy, people will just move their assets into things other than dollars. Like resources futures, which are independent of inflation.

The people who actually take on the burden of taxation are people who don't have the means or know-how to manage their assets. So the result is probably that poor and middle class people are even worse off.

> Not to mention, the bulk of this quantatitive easing took place during two years were we saw deflation - so increasing the money supply was something the government would have likely done anyway.

This is just underlining my question. If the congress were operating with an MMT view of the world, they could have injected money into beneficial social program without handwringing over deficits, avoided QE. Regular people would have more wealth in their hands, and less money would be running around the stock market inflating assets. We would have a healthier economy today.

> By comparison, if the government announced that starting in 2020 it would start paying for everything by printing more money

This isn't what MMT says to do, it keeps taxation as a control parameter, it just wouldn't be singularly obsessed about the budget deficit.

> If the congress were operating with an MMT view of the world, they could have injected money into beneficial social program without handwringing over deficits

Avoiding bank runs and the collapse of financial institutions is a pretty massive social benefit, even if it does turn into "bailing out wall street" memes.

> This isn't what MMT says to do, it keeps taxation as a control parameter, it just wouldn't be singularly obsessed about the budget deficit.

The whole premise over MMT as compared to standard government revenue streams is to reduce or substantially eliminate dependency on taxation by having the government print the money it needs. As pointed out earlier, if MMT simply refers to any amount of increase in the money supply then governments already have been practicing MMT for decades.

Again, simply look at what the proponents of MMT are promising. Universal service and government provided jobs for everyone that wants one. Peel off the veneer of the whole premise of inflation vs. taxation and it's really just a means of trying to let the government spend way more money by obfuscating revenue streams.

> Avoiding bank runs and the collapse of financial institutions is a pretty massive social benefit, even if it does turn into "bailing out wall street" memes.

In the immediate crash, I agree, but in the years after as QE kept being needed to stabilize the system, there were other choices. There could have been a different program to inject money directly to the people who took out mortgages, requiring lenders to take a principal write down at the same time. This would have left more wealth in peoples hands, instead of funneling more wealth and assets into bank hands. And in large part it was fear of deficits that prevented consideration of these options.

The argument isn't to "government spend way more money", it's to make a more balanced consideration of how we actually use the power of currency for beneficial purposes in the long term.

The difference is that money had to be paid back. Issuing loans is significantly different than the government taking on arbitrary amounts of debt and spending it all.

Uh, I think you are possibly mistaking TARP (which did need to be paid back) for Quantitative Easing (which did not). QE wasn't a loan, and the assets purchased by the Fed only recently started being returned, and there is no requirement to repurchase the assets by the same entity they were purchased from.

Make no mistake, the bailouts were a catastrophe and NOT fine. The author says as much:

"Compared to what I see as the inevitable “dual death spirals of MMT”, letting all those banksters fry in 2008 looks a lot more palatable in retrospect. David Stockman’s Great Deformation shows how the economy would have fully recovered by 2010 or 2011 instead of being where we are now: trapped at the Zero bound and headed toward democratic socialism and MMT."