The Scrooge McDuck theory of the rich

by John Quiggin on September 25, 2021

Readers of a certain age will remember Scrooge McDuck, the mega-rich uncle of Donald, who enjoys diving into his gigantic money bin filled with gold coins. Replace gold with paper currency[1] and you have the archetypal version of a theory of the rich [2] popular in some versions of Modern Monetary Theory.

Scrooge McMMT has a fancy house and a large bin to hold his money, but otherwise doesn’t spend that much on personal consumption or on physical investment. If the government increases his taxes, the level of money in the bin is lowered, but Scrooge’s expenditure on goods and services doesn’t change at all. Instead, he dips into the money bin a little further to buy politicians who will do his bidding, including (but not limited to) reversing the tax cuts increases.

Conversely, if the government prints money to buy goods and services from the (unspecified) businesses that provide Scrooge’s wealth, the money raises the level of the bin, and nothing else changes.

If this story is right, then there’s no need to tax Scrooge in order to divert resources from private to public use. The government can just create the money and let it pile up in Scrooge’s bin.

Entirely separately from economic effects, there’s Scrooge’s unfortunate habit of buying political influence for malign ends. If his wealth were all taxed away, that would stop.

This leads to a kind of motte and bailey argument. The full political program implied (the bailey) here is a combination of increased public spending and high taxes on the rich to reduce their influence. But since the two are logically separate, if the political resistance to taxation is too strong, we can retreat to the motte, and just spend the money, without running into any resource constraints.

When I get a round tuit, I’ll give some arguments as to why this model isn’t a good one. But (apart from the snarky cartoon reference), I think it’s a pretty fair characterization of the version of MMT presented in (for example), Stephanie Kelton’s The Deficit Myth

fn1. Paper would be more consistent with physical reality, since swimming in gold is a very bad idea.

fn2. An ambiguous term. The image conveyed, and the common use of examples like Bezos and Gates, suggests we are only talking about billionaires, but much of the actual debate concerns higher taxes on annual incomes starting at $250k or $400k.

{ 64 comments }

1

Senexx / AusMMT 09.25.21 at 2:44 am

Why would powerful individuals reverse tax cuts they are in favour of?
You are assuming all resources are fully utilised for private purposes?
No one argues for all wealth to be taxed away?

Spend at the bottom & tax at the top is in no way a motte & bailey fallacy. It’s just a predistribution of resources.

The argument through economic channels is a return to what you referred to in Zombie Economics as the Great Compression but with more inclusivity.

2

John Quiggin 09.25.21 at 3:06 am

“tax cuts” D’oh! Fixed that now.

The rest of your comment seems unrelated to my post, which is solely about how “the rich” react to taxes.

3

J-D 09.25.21 at 4:48 am

For the purposes of your analysis, is buying political influence distinguished from consumption of goods and services, or included as a sub-category of it?

(What’s Brett Kavanaugh’s price-tag?)

4

MisterMr 09.25.21 at 6:49 am

I don’t see the point: if Scrooge doesn’t hoard all the money, but merely spends a lower proportion of it than his nephew Donald, the government just has to print a bit less money so that when you sum government deficits and Scrooge expenses you reach the desired level of demand.

If the government desired deficit is lower than the government desired expenses on programs that the government wants to run for other reasons, say defense or the post office, then yes at least part of these expenses have to be founded by taxes, but this hasn’t much to do with the level of desired savings.

IMHO the real problems are two: (a) we won’t reach the desired level of employment without substantial inflation (also because the desired level of employment is 100%) and (b) when you take in account private money creation aka banks making loans this money printing will still cause huge bubble (as Scrooge invests his money in assets that give him some interest, likely driving the asset prices higer) that in the end will crash causing havoc for everyone.

B is the reason we have to tax the rich (actually the wealthy), but A is the real problem IMHO: the MMTers and many other seem to think that inflation is caused by an increase in the quantity of money, but I believe it is caused by wage price spirals and the increase in the quantity of money happens as a consequence. If I am right we can’t have very high employment without some inflation.

5

John Quiggin 09.25.21 at 6:49 am

The model works best if you assume the pols have their own swimming pools full of money, into which payoffs are deposited

6

Brian Hanley 09.25.21 at 7:08 am

Billionaires rarely hold money in bank accounts. Their wealth is stock market assets mostly. Sometimes bonds. Little guys, millionaires, hold cash money in banks and buy real estate.

7

Jacques Distler 09.25.21 at 7:35 am

Does the model fall apart if we replace the assumption that Scrooge’s surplus cash accumulates in a bin with the slightly more realistic assumption that Scrooge’s surplus cash is managed by some money-manager, charged with investing it? Now, more money in Scrooge’s bin — instead of having no effect whatsoever — has the (presumably salutary) effect of lowering the cost to enterprises of raising capital.

The key presumption is that more money for Scrooge doesn’t cause him to raise his consumption.

8

Left Outside 09.25.21 at 7:37 am

There’s definitely a slightly strange popular idea that billionaires just have a lot of cash on hand. For example, lots of people are confused why Jeff Bezoz isn’t investing his money in ending homelessness rather than swimming in his pool of gold, well its because tye vast majority of his money is tied up in warehouses, data centres and delivery trucks (and various intangibles which is more complicated). He’s been very busy in the business of logistics and digital infrastructure which has tied up rather a lot of the billions in wealth, and he’s focused his mental efforts on improving productivity there rather than homelessness policy.

9

Gorgonzola Petrovna 09.25.21 at 9:21 am

“Entirely separately from economic effects, there’s Scrooge’s unfortunate habit of buying political influence for malign ends. If his wealth were all taxed away, that would stop.”

Interesting. Just yesterday I was reading about the new anti-oligarch law in Ukraine, that some there call “millionaires’ war on billionaires”:

The law provides a definition for an oligarch and gives a body headed by the president, the National Security and Defence Council, the power to determine who meets the criteria.

Oligarchs would be forbidden from financing political parties or taking part in privatizations. Top officials, including the president, prime minister and head of the central bank, would be required to declare dealings they had with them.

…and the reaction to it of the Canadian Ambassador Larisa Galadza, who said (I’m translating back to English from here) that having laws against a category of people is not a good idea. Laws, she believes, should address specific actions, not categories of people.

10

aubergine 09.25.21 at 9:56 am

Scrooge McDuck’s money bin is full of actual currency, it’s not even in a bank account, so his cash isn’t going to have much practical effect on the nation’s money supply as long as it’s sitting there.

If so many people held their money like this that it became a problem, the government could try to tax the reservoir of currency directly but could also reduce its value, and the power that goes along with holding it, through inflation – by, for example, spending lots of money without raising taxes. So the motte may be quite enough.

In practice most of this money would probably be invested in something (as, if I recall correctly, much of Scrooge McDuck’s actual wealth was), even if only in an interest-bearing account, so it would be fully part of the money supply. The government wouldn’t be able to just let the money pile up without it having any effect on the economy.

11

RichardM 09.25.21 at 11:05 am

The model works best if you assume the pols have their own swimming pools full of money, into which payoffs are deposited

Surely the solution here is to print money and deposit it in the swimming pools of the pols? The ducks will be emptying their pools into a bottomless pit if they try to compete and keep some politicians bought.

In practice this mostly means state funding for the building-full of advisers a politicians needs to have to be taken seriously on the national stage.

Providing that for all senators and congresspeople seems excessive, I’d guess you need about 10 slots. Everyone else can be in a position to work towards grabbing one of those slots. Maybe expand the numbers of VPs to 10, and restore the tradition of them coming from both parties?

12

Adam Kotsko 09.25.21 at 12:34 pm

I’m excited for MMTers to show up and say there is some unspecified problem with your post, which would be fixed if you read some of unspecified MMT literature.

13

J-D 09.25.21 at 1:07 pm

‘Like his rival, he is a shrewd businessman and has managed to organize a worldwide financial empire that can easily rival those of Scrooge or Flintheart Glomgold. Unlike them, he is not a tightwad but much more a liberal spender (but by no means a squanderer), as Rockerduck seems to maintain that “you have to spend money to make money”. … Rockerduck has a taste for luxury, and likes to show off his wealth.’

https://en.wikipedia.org/wiki/John_D._Rockerduck

14

Peter T 09.25.21 at 1:18 pm

@9

That’s an easy objection to meet. The law simply provides that the action of accumulating more than some set amount of wealth carries certain consequences.

But the objection would surely apply to the laws most countries have that require many officials (a category of people) to refrain from some actions and perform others (eg keep records, not accept gifts over a trivial value, declare their incomes and assets…)

15

MisterMr 09.25.21 at 1:49 pm

@Gorgonzola Petrovna 9
“Laws, she believes, should address specific actions, not categories of people.”

What about a category of people who makes the action of accumulating a lot of wealth, and therefore become billionaires?

16

Rapier 09.25.21 at 2:50 pm

RE 6 “Their wealth is stock market assets mostly”

Now we are talking. Wealth is not measured by money in hand, that is cash or on demand bank accounts. Rather it is measured in the mark to market price of assets. The stupendous rise in wealth that has accrued to the top 1% and 10% dwarfs even the rapid expansion of the money stock, M2 for instance. https://fred.stlouisfed.org/series/M2SL

Data from the Fed Q2 2021 Z.1 report. Household Assets jumped $6.196 TN, or 16.2% annualize, during Q2 to a record $159.342 TN. Yes, the wealth of American households rose 16%, last quarter! Wow, great. Oh by the way never say that assets inflate, they only increase in value. Well civilians can mention it but nobody who gets paid to write about ‘monetary policy’ is allowed to. There’s a law somewhere I’m sure.

By the way focusing totally on the government side of debt is a blindered way to look at the world.

17

Sashas 09.25.21 at 4:01 pm

Gorgonzola Petrovna @9:

This might be a bit of a tangent, but Ambassador Galadza is making a stealth argument there that we should not take at face value. We view laws against categories of people as bad because historically these have been laws used to identify and persecute people, often racial, ethnic, and religious groups. This is a strong case against such laws, but it relies heavily on the definition of “categories of people”. Compare to tenants’ rights laws, which are laws addressing the category of people “landlords”. As far as I’m aware, barely anyone (other than landlords) has a problem with these laws. The main distinctions I see are (1) that landlords (and billionaires) chose to voluntarily enter the category and may choose to exit it at any time, and (2) that the laws involved for landlords (and billionaires) largely impact what influence they are allowed to exert over other people.

18

eg 09.25.21 at 8:16 pm

Is there really “a motte and bailey argument” or are there two separate conversations?

That taxation is a weapon against the dangers plutocracy poses to democracy strikes me as a subject for inquiry in political science.

That taxation doesn’t fund sovereign spending strikes me as a subject for inquiry into fiat monetary operations (closer to macroeconomics than political science)

That some of the same people may have interests in both inquiries doesn’t seem to me proof that there is some underhanded substitution going on.

19

both sides do it 09.25.21 at 9:13 pm

I always thought another MMT goal, besides throwing a wrench in the market to buy politicians, was to move away from the “financialization” of the economy; the various wealth / financial transaction taxes and heavy banking regulation proposed also serve that purpose

MUCH more importantly: they rebooted the Scrooge McDuck cartoon with his McNephews fairly recently and it’s commonly cited as a hit with the kids, so the old-man throat-clearing at the start is itself, ironically, out of date

20

Frank Wilhoit 09.25.21 at 10:33 pm

Your analogies were good — until recently, but this is the human lifespan of devolution (check back tomorrow). Today (again, check back tomorrow) material rewards no longer have any salience, only emotional rewards; and the emotional reward of accumulating wealth is primarily the distress of those from whom it was stolen. Found or earned wealth would not convey this reward. There is a secondary reward, which is the distress of those against whom it is weaponized.

Gorgonzola Petrovna @ 9: Which action? The buying, or the being bought? Every effort against corruption founders on this question.

21

John Quiggin 09.26.21 at 4:48 am

Adam Kotsko @12 FTW !

22

Gorgonzola Petrovna 09.26.21 at 7:59 am

@Frank Wilhoit,
I’ll try to translate another paragraph: “We [Canadians] don’t have such a law [i.e.: discriminating against the super-rich]. We have laws regulating lobbying, financing election campaigns, ownership of strategic industries, and such. Together, they counteract.”

@Sashas,
I don’t think there are any laws preventing landlords from doing things non-landlords are allowed to do. Convicted felons would be a better example.

Ironically, the super-rich is exactly ‘the minority’ that James ‘Father of the Constitution’ Madison felt needs protection; constitutional protection against those who “labour under all the hardships of life”: “An increase of population will of necessity increase the proportion of those who will labour under all the hardships of life, & secretly sigh for a more equal distribution of its blessings. These may in time outnumber those who are placed above the feelings of indigence. According to the equal laws of suffrage, the power will slide into the hands of the former. No agrarian attempts have yet been made in in this Country, but symptoms, of a leveling spirit, as we have understood, have sufficiently appeared in a certain quarters to give notice of the future danger. How is this danger to be guarded agst. on republican principles? How is the danger in all cases of interested coalitions to oppress the minority to be guarded agst.?

23

MisterMr 09.26.21 at 9:23 am

@Rapier 16

I agree that asset prices going up are a problem, but I disagree that we should call it ‘inflation’, I think we should call it ‘bubble’.

My reason is this: in the general concept of inflation, we should see all prices going up, and thus the ratio of wealth/gdp should be stable.
Instead, we see asset prices going up much faster than consumption goods prices, and therefore the ratio of wealth/gdp increases a lot.
This is what we generally call bubble, not inflation, however since the ones rising the problem are hard currency guys they tend to call it inflation because this term is closer to their political views.

I think that there is a problem here because people who think in terms of quantity of money will not be able to differentiate between nominal wealth and nominal income, as if you think in terms of quantity of money the two should be proportional. But in the real world they are not, or we would never have bubbles or changes in the debt/gdp ratio.

@aubergine 10
Even if the paper money exits Scrooge’s deposit, it becomes someone else’s savings: I see that people tend to think in terms of hoarded money VS circulating money, but in reality this distinction doesn’t exist because all money is always savings, the only thing that changes is whose savings.
The real distinction IMO is between the flow of money and the stock of money, and in this sense the quantity of money is always a stock, never a flow.

24

PatinIowa 09.26.21 at 9:50 pm

“Laws, she believes, should address specific actions, not categories of people.”

I’d like to see a law that prevents a person from leaving more than $10 million (in any form, including property) to any individual human being. I know a million isn’t what it used to be, but I’m pretty sure the heir could get a pretty good start in life with that.

And if someone said, “But then nobody would be incentivized to build international corporations,” I’d say, “Good.”

25

RichardM 09.26.21 at 10:36 pm

@23

Even if the paper money exits Scrooge’s deposit, it becomes someone else’s savings:

This is only true if you consider the government to be a ‘someone’; a corporate person who owns a specific quantity of money that gets increased when they collect taxes.

Which is pretty much exactly the topic of dispute. Are they? If so, is there a coherent and internally consistent world in which they are not?

If so, is such a world better or worse than ours?

26

Max B. Sawicky 09.26.21 at 11:03 pm

The dirty little secret of MMT is that in the event of an expectation of undesirably high inflation, the consumption of the masses will need to be held back, quite possibly with a VAT. As JQ indicates, the show of desiring to tax the rich is entirely superfluous to their macro framework. And since it is superfluous, it is easily discarded.

27

John Quiggin 09.27.21 at 12:21 am

That’s certainly true of the paper by Nersisyan and Wray. They canvass options like forced saving and rationing, but treat taxing high incomes as politically impossible

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3398983

28

J-D 09.27.21 at 12:51 am

They canvass options like forced saving and rationing, but treat taxing high incomes as politically impossible.

So MMT exists for people who have decided that the political power of rich people is so great that it’s impossible to get them to pay taxes as a way of making them feel better about this decision?

29

Sashas 09.27.21 at 2:57 am

@Gorgonzola Petrovna 22:

I don’t think there are any laws preventing landlords from doing things non-landlords are allowed to do.

The example that comes to mind is no-warning, no-cause evictions. A landlord is generally not permitted by law to evict a tenant without cause or warning, while a non-landlord who nevertheless has a “tenant” of some kind is allowed to do so. (e.g. A couch-surfer does not have renter’s rights.) It’s not a perfect analogy, I admit. Anti-monopoly laws might be a better example, where if I own a business of one type I’m not permitted to purchase a business of certain related types. Moreover, anti-monopoly laws as I understand them are quite clear that my degree of success matters. I’m not allowed to capture beyond a certain amount of the market, so a failed businessperson has more leeway than a successful one.

Convicted felons on the other hand is a terrible example, as they do not have the ability to stop being convicted felons and in some cases did not voluntarily choose to become such in the first place.

Regarding James Madison, I’m not sure what you expect me to say. I don’t consider the Founders to be authorities on morality of any kind. If your point is that someone does indeed object to restrictions on billionaires, I’ll happily agree that plenty of people do. This includes non-billionaires even. I was drawing a connection to something very few openly object to (regulation of landlords) as a fairer analogy than ethnic persecution.

30

Seekonk 09.27.21 at 4:20 am

Keynesian capitalism is the best version of capitalism, but it requires a government inclined to and capable of regulating and taxing private economic actors.

But unfortunately, ‘free market competition’ consists of big fish constantly eating little fish, resulting in a relative handful of whales and sharks whose economic power allows them to capture and control the political and regulatory process.

Or as Gorgonzola Petrovna put it @9: ‘Scrooge’s unfortunate habit of buying political influence for malign ends.’

31

Gorgonzola Petrovna 09.27.21 at 8:30 am

@PatinIowa “And if someone said, “But then nobody would be incentivized to build international corporations,” I’d say, “Good.””

Thank you. There was a time, not too long ago, when corporations, especially multinational corporations, were considered the main corrupting force. Most of them have much more resources than any rich individual. They are far more sociopathic, inhumanly rational, than any Scrooge McDuck is. Yes, even when they act ‘woke’. And no, I don’t see how preventing humans from leaving more than $10 million to other humans would affect them at all. But then something has changed, and it seems the multinationals aren’t the culprit anymore, in the public mind.

32

Gorgonzola Petrovna 09.27.21 at 12:35 pm

@Sashas “If your point is that someone does indeed object to restrictions on billionaires, I’ll happily agree that plenty of people do.”

Some (and who can blame them) would even advocate lining them up against the wall and summarily shooting them. But not those who subscribe to the liberal doctrine with ‘freedoms’, ‘human rights’, ‘equality before the law’ and so on. Which is what I heard from the Canadian Ambassadress in Ukraine.

Although, frankly I was surprised to hear this criticism from her. Apparently she is, as we say “не в теме”, out of the loop. The obvious realpolitik purpose of it is taking assets from domestic oligarchs (who at least have some, if minimal, interest in domestic prosperity) and handing them over to western-based multinationals.

Oh, and someone who is a landlord certainly can kick out her couch-surfer.

33

Rapier 09.27.21 at 1:07 pm

“I disagree that we should call it ‘inflation’, I think we should call it ‘bubble’.”

I mean really. Do you still stand by this a couple of days later?

34

eg 09.27.21 at 8:50 pm

I’m not sure how the statement “taxation doesn’t fund spending” (a statement about fiat monetary operations) somehow leads to “taxation isn’t necessary” since “the money story” of MMT begins with a sovereign which provisions itself by levying a tax obligation denominated in tokens of its own issue?

35

William Berry 09.28.21 at 2:32 am

GP@32:

“Ambassadress”

Really?

Is that a special dress supposed to be worn by embassy staff?

I mean, come on. Feminine diminutives still in vogue in your circle?

36

J-D 09.28.21 at 2:33 am

Regarding James Madison, I’m not sure what you expect me to say.

I wrote a comment here once in which I referred to him as ‘that clown James Madison’; how’s that?

37

John Quiggin 09.28.21 at 3:32 am

eg you seem to be in the wrong thread, but the MMT “money story” starts with the claim that the sovereign has to spend the money first, so spending precedes taxation. https://www.abc.net.au/news/2020-07-17/what-is-modern-monetary-theory/12455806 I agree that this is the wrong way around. No would would provide goods and services in return for fiat money unless they already knew that the sovereign would be demanding it back to pay taxes.

38

J-D 09.28.21 at 4:33 am

eg you seem to be in the wrong thread, but the MMT “money story” starts with the claim that the sovereign has to spend the money first, so spending precedes taxation. https://www.abc.net.au/news/2020-07-17/what-is-modern-monetary-theory/12455806 I agree that this is the wrong way around. No would would provide goods and services in return for fiat money unless they already knew that the sovereign would be demanding it back to pay taxes.

It seems to me that the empirical question of ‘which comes first?’ is a complicated historical enquiry. Purely theoretically, it’s possible to imagine that if the government announces that it will accept (its own) notes in payment of taxation, then it can (and, indeed, would have to) spend notes which it has printed before collecting (some of) them in taxation, and this may be what actually happened in some cases.

If there’s a chronological sequence like this:
1. announcement of government plans to collect taxation (in banknotes)
2. government spending (in newly issued banknotes)
3. taxes collected (in some of the same banknotes)
–then does that count as taxation coming before spending, or spending coming before taxation?

However, isn’t it relevant to discussions of chronological sequence that there was money before there were banknotes? Wasn’t there a time when banknotes were issued with a promise that they could be redeemed for specie, a promise which was at least partly honoured at least part of the time? Isn’t one of the origins of fiat money a government decision to convert existing banknotes exchangeable on demand for specie into banknotes with no such guarantee of exchange? When money was issued as specie, which came first, government spending or taxation? And apart from the interest of historical enquiry, why would anybody suppose that any of this makes a practical difference now?

39

MisterMr 09.28.21 at 4:57 am

@Rapier 33

Yes, I do: inflation is defined as a fall in the value of money, not as an increase in the price of assets.

40

Tm 09.28.21 at 7:13 am

The Swiss just declined another opportunity to vote for higher taxes on the super Rich, and graciously declined. The proposal called the „99% Initiative“ would have required the government to tax capital income (above a certain threshold) 50% higher than labor income. It garnered all of 35% approval. A grim reminder how politically impossible taxing the rich indeed has become. Roughly two thirds of the 99% seem to really, really hate the idea of annoying the 1% (respectively the.1%).

It has to be said that the left didn’t even put up a fight, expecting to lose anyway. No idea what they were thinking.

41

Alex SL 09.28.21 at 8:00 am

I am not an MMTer, but the fact that enormous concentrations of wealth mean disproportionate and democratically illegitimate political power is one of the key issues of our age.

You don’t even need to buy politicians if “I am moving my headquarters to another location” means the current location of those headquarters will be beggared overnight. You don’t even need to buy politicians if you own the newspapers or TV studios that can make or break their careers. But on top of that, you can also buy politicians or, as it works in polite society these days, hire them as advisors or suchlike a year after they have left office, because they sent some tax cuts, relaxed regulations, cushy contracts, and undervalued assets your way while in office. (It ain’t bribery if the bribe comes after the favour, right?)

42

steven t johnson 09.28.21 at 4:39 pm

Nit-picking buttons getting pushed here, sorry.

1) eg@34 writes as if the money story of MMT begins with the origin of money itself, to my eyes at least. It seems likely the “Modern” part of MMT has some reference (or equivocation in hostile readings?) to modern banking and fiat currency. It’s not at all clear to me that MMT has any influence at all with governments. It seems very much a thing promoted by a handful of dissidents who’ve lost out in the struggle for policy formation. Nor it it at all clear to me that MMT is likely to have any real influence in economics departments either, no more than Austrian economics anyhow. Even though all critiques of MMT seem to be more of an idle pastime though, quoting somebody might be helpful.

2) William Berry@35 invents a “feminine diminutive.” A feminine suffix is no more diminishing than being a woman is. As a reproach to Gorgonzola Petrovna, this is lauding with a faint damn, a perverse play on “damning with faint praise.” Of all the things one could say about this commenter, this is the offense that can’t be overlooked?

3)John Quiggin@37 wrote ” No would would provide goods and services in return for fiat money unless they already knew that the sovereign would be demanding it back to pay taxes.” This is incorrect. Armies have sometimes compensated the owners of goods and properties levied with their government’s currency. It may not be worth a Continental damn, of course. If I remember correctly, the Kenya colonial government deliberately shifted to a policy of demanding taxes in British currency, to drive Kenyans into the market economy. This seems to me a nice illustration of a general principle. (Michael Perelman had some interesting observations on this subject in his The Invention of Capitalism.)

43

Scott P. 09.28.21 at 9:12 pm

Even if the paper money exits Scrooge’s deposit, it becomes someone else’s savings: I see that people tend to think in terms of hoarded money VS circulating money, but in reality this distinction doesn’t exist because all money is always savings, the only thing that changes is whose savings.

This only works if you call things like unmined gold ‘savings’ — imagine a gold-based economy where a mine is found, that will definitely change the money supply. Now replace the mine with a buried hoard of gold placed there centuries before which is suddenly found again — that is an indistinguishable case. It doesn’t have to be gold, of course, any currency that has maintained some value can substitute, which means you also have to call things like unprinted bills and unissued credit ‘savings’.

44

Rapier 09.28.21 at 9:18 pm

In a similar vein to MMT here is a discussion of unicorns on the moon.
Well no, actually it is a discussion of the role of bank reserves and how reserve requirements limit credit expansion. The funny thing is that banks do not lend from deposits. Reserve requirements have nothing to do with the propensity to lend. Deposits do not fund to loan. Loans create deposits. No matter, these serious men discuss nonsense in serious tones and serious people believe them. It just as well be a discussion of unicorns on the moon.

45

Peter T 09.29.21 at 12:55 am

“No would would provide goods and services in return for fiat money unless they already knew that the sovereign would be demanding it back to pay taxes.”

It is not obvious to me that when, say, Amazon accepts my Visa payment they only do so because some government will later demand taxes. Especially as they don’t pay taxes.

I would like to see a more precise definition of ‘wealth’ used in these arguments. Is my house ‘wealth’? The contents of my pantry? My wardrobe?

46

rogergathmann 09.29.21 at 7:28 am

Is this an empirical claim? I’m not sure who the “no [one} would provide goods and services” is, who is motivated not by fiat money but by fiat money backed by some idea of equilibrium. I don’t believe this motive really operates in the real world. Vide, for instance, cryptocurrency. Whether you think the latter is a fraud in the long run, certainly people provide goods and services in return for it with no thought that the sovereign – in this case the provider of the cryptocurrency – would demand it back to pay taxes.
THe more I look at that claim, the more I don’t understand what it is a claim about.

47

MisterMr 09.29.21 at 11:10 am

@Scott P. 43

I don’t understand your point. What have this to do with the distinction between hoarded/circulating money?

My point is, to put it in other words, that what we are interested in is the flow of money, not the quantity of it. If we take a pure quantity of money logic, we see that the price level P is equal to the quantity of money M multiplied by the velocity of money V divided by the amount of stuff consumed and produced in the relevant time period S.

P = MV/S

We need the velocity of money “V” in this equation because the quantity of money M is a stock, but the quantity of stuff consumed and produced is obviously a flow.

But money doesn’t walk on its own legs, so V is not really a constant: in periods of high inflation, it is generally V that increases, not M, and the reverse in periods of deflation.

On the other hand, V obviously depends on the price of stuff, so it is more likely that V is the dependent variable and P the independent one than the reverse.

The problem of the distinction between hoarded and circulating money is that it treats circulating money as if it was a flow, even if we distinguish between hoarded and circulating (that anyway is a spurious distinction) circulating money is still a part of M, whereas it is threated as if it was MV.

48

MisterMr 09.29.21 at 11:36 am

@Rapier 44

Banks would not need reserve deposits to lend, but are mandated by law to not lend above a certain proportion of their reserves, that is if the required reserves are 20%, and the bank has 100$ in deposits, it can’t lend (and thus create) more than 500$.

So while logically the bank doesn’t need deposits to lend, legally it does need at least some (although I think the fraction is much lower than 20%).

49

nastywoman 09.29.21 at 7:07 pm

@40
‘Roughly two thirds of the 99% seem to really, really hate the idea of annoying the 1% (respectively the.1%)’.

Or – NOBODY in Switzerland is ‘diving into his gigantic money bin filled with gold coins’ even as everybody in Switzerland obviously ‘RICH’.
(as you HAVE to be RICH if you can afford to live in Switzerland)
So it’s actually quite surprising that 35 percent of the rich Swisx would like to tax themselves (more) and did you guys read:

‘Among white Americans, the rich voted to the left of the middle class and the poor in 2016 and 2020, while the poor voted to the right of the middle class and the rich’.

So why are ‘the Poor’ seem to like to vote for Scrooge McDuck –
(at least in ‘Disney’ – I mean ‘Trumpland’?)

50

Cranky Observer 09.30.21 at 12:51 am

Next we need to do Sand Hill Road Monetary Theory, where eagle-eyed billionaires survey the entire solar system and with ice-cold impeccable logic make purely rational and optimal growth-, wealth-, and human future- maximizing decisions about where to invest their legitimately acquired reserves of investable liquid assets.

51

John Quiggin 09.30.21 at 1:01 am

Roger G @40 The theory underlying crypto is some form of anarcho-capitalism, in which cryptocurrencies displace sovereign-issued currencies. The adoption of crypto as legal tender by El Salvador is supposed to be a vindication of this theory

As with all bubbles, lots of market participants are working on the “greater fool” theory

52

J-D 09.30.21 at 2:30 am

So MMT exists for people who have decided that the political power of rich people is so great that it’s impossible to get them to pay taxes as a way of making them feel better about this decision?

I notice nobody saying ‘No’ …

53

John Quiggin 09.30.21 at 4:35 am

Cranky @50 This is the (strong) Efficient Markets Hypothesis, one of the zombies I tried to slay in Zombie Economics

STJ @45 ” If I remember correctly, the Kenya colonial government deliberately shifted to a policy of demanding taxes in British currency, to drive Kenyans into the market economy.” This is exactly right and an example of the sequence I described

J-D @50 That’s a central part of its popular appeal

Peter T @45 It doesn’t matter whether Amazon has to pay taxes in dollars. What matters is that someone has to pay.

54

J-D 09.30.21 at 5:10 am

One problem with the idea that it doesn’t matter whether the rich are taxed is that, on the whole, the rich behave very much as if it matters to them whether they are taxed.

I suppose it might be consoling to some if they can convince themselves that in this respect the rich are just participating in the same delusion as other people, but I can’t find the explanation plausible.

55

Tm 09.30.21 at 9:18 am

@49: I know you speak in jest but no, not everybody in Switzerland is “obviously ‘RICH’”.

“So it’s actually quite surprising that 35 percent of the rich Swisx would like to tax themselves (more)”

The proposal was written so that it would only have affected individuals with a capital income above 100’000 Francs (https://99pourcent.ch/arguments/) . Even the upper middle class definitely wouldn’t qualify. It really was an attempt to specifically target the capitalist class, which I think deserves some attention. It was poorly executed but the principles are sound.

56

Tim H. 09.30.21 at 12:29 pm

@49 I’m speculating that working poor in the US vote for what they imagine the .01% would like, lest they bring further disaster on their households. This may have a connection to denominations who were bent by proximity to power in the antebellum south who discovered speaking truth to power could bring a visit from power’s enforcers.

57

Rapier 09.30.21 at 4:43 pm

RE “Banks would not need reserve deposits to lend, but are mandated by law…………”

Oh boy. The Federal Reserve announced they were reducing the reserve requirement ratio to zero percent across all deposit tiers as of March 26, 2020. https://www.eidebailly.com/insights/articles/2020/4/federal-reserve-eliminates-reserve-requirements

At any rate the point was the discussion was total nonsense on its face. No second order sort of exception, which sort of proves the point, somehow.

58

steven t johnson 09.30.21 at 8:35 pm

John Quiggin@53 “This is exactly right and an example of the sequence I described.”
Odd as it may seem, I must disagree that I was exactly right. I thought the Kenya colonial government wasn’t issuing fiat currency, for a start. Nor did I think the colonial government was buying goods and service directly from Kenyans. I misunderstood that the goal was to force subsistence farmers in a heretofore moneyless system (as the colonial government perceived it, at any rate) to engage in market society, that is, to work for English colonists and firms in Kenya, to avoid penalties for not having cash to pay taxes.

This story seemed to me to have much more to do with the state as the creator and guarantor of essential infrastructure for a national market, a national currency. Losing a war puts paid to that project with true (in my judgment) hyperinflation. But I don’t understand how either story (the correct one or mine) bears on MMT.

59

MisterMr 09.30.21 at 10:29 pm

@Rapier 57
”The Federal Reserve announced they were reducing the reserve requirement ratio to zero percent across all deposit tiers as of March 26, 2020.”

I didn’t know this. Intetresting!

60

J-D 10.01.21 at 2:12 am

I’m speculating that working poor in the US vote for what they imagine the .01% would like …

I’m not clear on what you’re referring to here. It is of course the case that many poor people vote Republican, but statistically likelihood of voting Republican correlates with income: the higher the income the more likely to vote Republican, the lower the income the more likely to vote Democrat. Poor people and rich people don’t vote the same way: the opposite is the case.

61

Zamfir 10.01.21 at 7:49 am

@MrMister, low (or zero) reserve ratios can be misleading. Banks are still required to maintain a buffer of highly liquid “safe” assets, it’s just become less important that those assets take the shape of central bank deposits. Simply put, if a bank chooses to hold less central bank deposits, it has to hold more treasuries to compensate.

If the the bank needs central bank deposits anyway, then the bank can pretty much immediately swap those treasuries for central bank deposits. So in practice, there is not that much difference between holding central bank deposits directly, and holding another asset that the central bank will quickly accept as collateral for a loan of central bank deposits.

And by extension, the reserve ratio requirement does not tell you much in isolation. It’s part of wider constellation of capital and liquidity requirements.

I don’t know much about this, bit my impression is that regulators nowadays put more focus on capital buffers than on liquidity. The idea is that central bank can always step to provide liquidity, if can be sure that the bank is well capitalized.

62

Tim H. 10.01.21 at 1:27 pm

@60 Would that my experience matched yours….

63

J-D 10.01.21 at 11:35 pm

<

blockquote>Would that my experience matched yours….That you should suppose I made the kind of comment I did on the basis of my own personal experience is a disparagement, although I’m sure not an intentional one. My own personal experience, as it happens, contains no Republicans whatever. Do I, on the basis of this personal experience, question the very existence of so many alleged Republicans? No, I don’t say anything that damn stupid.

I don’t know whether you happen to know personally a tiny number of Republican-voting poor people and to attach more evidential weight to that experience than to the extensive survey evidence, but if you do you are wrong.

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J-D 10.01.21 at 11:36 pm

Damn tags!

Would that my experience matched yours….

That you should suppose I made the kind of comment I did on the basis of my own personal experience is a disparagement, although I’m sure not an intentional one. My own personal experience, as it happens, contains no Republicans whatever. Do I, on the basis of this personal experience, question the very existence of so many alleged Republicans? No, I don’t say anything that damn stupid.

I don’t know whether you happen to know personally a tiny number of Republican-voting poor people and to attach more evidential weight to that experience than to the extensive survey evidence, but if you do you are wrong.

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