Feb 8, 2022·edited Feb 8, 2022Liked by Zichen Wang
Thanks for this translation; it's very helpful to know how important Chinese officials see the macroeconomic world. What's unfortunate is that Lu seems to have a deeply flawed view of what MMT actually teaches, especially with regard to quantitative easing (QE), if he actually believes that "[MMT argues that] To address economic woes and achieve full employment, central banks can inject liquidity into the market by purchasing government bonds and at the same time reduce the costs of government debt financing to increase the government’s solvency."
Without getting too far into the weeds, it's hard to do an effective debunking, but I will just take a few snips from a 2009 blog post by Bill Mitchell, one of the most respected scholars of MMT:
Some readers have written to me asking to explain what quantitative easing is...We need to understand that it is not a very good strategy for a sovereign government to follow in times of depressed demand and rising unemployment...Quantitative easing merely involves the central bank buying bonds (or other bank assets) in exchange for deposits made by the central bank in the commercial banking system – that is, crediting their reserve accounts. The aim is to create excess reserves which will then be loaned to chase a positive rate of return...So quantitative easing is really just an accounting adjustment in the various accounts to reflect the asset exchange. The commercial banks get a new deposit (central bank funds) and they reduce their holdings of the asset they sell...Does quantitative easing work? The mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment. It is based on the erroneous belief that the banks need reserves before they can lend and that quantititative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates...Bank lending is not “reserve constrained”. Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterwards...The point is that building bank reserves will not increase the bank’s capacity to lend. Loans create deposits which generate reserves. [ http://bilbo.economicoutlook.net/blog/?p=661]
Note that Mitchell was writing in the early days of QE; nothing I've seen in the intervening years indicates any change of views in the MMT community. Moreover, his prediction that QE would be ineffective at providing a useful stimulus has been emphatically confirmed. QE was advocated by mainstream economists; it has been firmly dismissed by MMT advocates. Sad to learn that such an important misconception has been advanced by a high-ranking Chinese official.
What Stanley Dundee wrote. In China, like the rest of the world, people who should know better still insist on writing about MMT without talking to anyone who could #TeachMMT. Even mere readers of the popular books by Stephanie Kelton, Pavlina R. Tcherneva, Mariana Mazzucato... can correct this and most articles critical of MMT. I hope that China's economists soon learn better.
Unbelievable! The article says QE is MMT! (There's an extensive discussion of how that's not true in the MMT text "Macroeconomics" by Watt, Wray and Mitchell...or just look at Stanley Dundee quoting Mitchell below).
The Chinese are as bad as the orthodox economists... You know, the ones who want to raise interest rates to cure the inflation caused by a) supply chain issues like jammed ports, or b) COVID, or c) Profit-hungry companies. Yep. Raising interest rates will unjam the ports, cure COVID and make those profitable corporations withdraw their price increases!
The physicians who believed bleeding patients cured them had better ideas than the current economic orthodoxy.
Interesting paper but as other comments have said still includes some misunderstandings in making a linkage between QE and MMT and talk of “The world’s major central banks' practice of MMT enables a transfer of debts from the private sector to the government sector.” And “Japan further put MMT into practice”. Must get past this “practice” nonsense and talk about “understanding” and what that understanding enables governments to do.
Talks of the problems of wealth inequality via asset price inflation (and blames that on MMT) but doesn’t see/articulate the conflict between an industrial economy and a financialised rentier economy as being the nub of the matter. QE for asset purchases has been operating instead of QE for productive purposes as has been well made out by Michael Hudson, Richard Werner and others. MMT doesn't exacerbate inequality but the manner of practicing QE does!
Wish economists would give up on trying to turn their field of (scientific) study/theory into the equivalent of a study of fluid mechanics, at least for the time being! Less Isaac Newton, Bernoulli & Co and more sociology/behavioral economics please. Bunch of try-hards.
Thanks for this translation; it's very helpful to know how important Chinese officials see the macroeconomic world. What's unfortunate is that Lu seems to have a deeply flawed view of what MMT actually teaches, especially with regard to quantitative easing (QE), if he actually believes that "[MMT argues that] To address economic woes and achieve full employment, central banks can inject liquidity into the market by purchasing government bonds and at the same time reduce the costs of government debt financing to increase the government’s solvency."
Without getting too far into the weeds, it's hard to do an effective debunking, but I will just take a few snips from a 2009 blog post by Bill Mitchell, one of the most respected scholars of MMT:
Some readers have written to me asking to explain what quantitative easing is...We need to understand that it is not a very good strategy for a sovereign government to follow in times of depressed demand and rising unemployment...Quantitative easing merely involves the central bank buying bonds (or other bank assets) in exchange for deposits made by the central bank in the commercial banking system – that is, crediting their reserve accounts. The aim is to create excess reserves which will then be loaned to chase a positive rate of return...So quantitative easing is really just an accounting adjustment in the various accounts to reflect the asset exchange. The commercial banks get a new deposit (central bank funds) and they reduce their holdings of the asset they sell...Does quantitative easing work? The mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment. It is based on the erroneous belief that the banks need reserves before they can lend and that quantititative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates...Bank lending is not “reserve constrained”. Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterwards...The point is that building bank reserves will not increase the bank’s capacity to lend. Loans create deposits which generate reserves. [ http://bilbo.economicoutlook.net/blog/?p=661]
Note that Mitchell was writing in the early days of QE; nothing I've seen in the intervening years indicates any change of views in the MMT community. Moreover, his prediction that QE would be ineffective at providing a useful stimulus has been emphatically confirmed. QE was advocated by mainstream economists; it has been firmly dismissed by MMT advocates. Sad to learn that such an important misconception has been advanced by a high-ranking Chinese official.
What Stanley Dundee wrote. In China, like the rest of the world, people who should know better still insist on writing about MMT without talking to anyone who could #TeachMMT. Even mere readers of the popular books by Stephanie Kelton, Pavlina R. Tcherneva, Mariana Mazzucato... can correct this and most articles critical of MMT. I hope that China's economists soon learn better.
Unbelievable! The article says QE is MMT! (There's an extensive discussion of how that's not true in the MMT text "Macroeconomics" by Watt, Wray and Mitchell...or just look at Stanley Dundee quoting Mitchell below).
The Chinese are as bad as the orthodox economists... You know, the ones who want to raise interest rates to cure the inflation caused by a) supply chain issues like jammed ports, or b) COVID, or c) Profit-hungry companies. Yep. Raising interest rates will unjam the ports, cure COVID and make those profitable corporations withdraw their price increases!
The physicians who believed bleeding patients cured them had better ideas than the current economic orthodoxy.
Interesting paper but as other comments have said still includes some misunderstandings in making a linkage between QE and MMT and talk of “The world’s major central banks' practice of MMT enables a transfer of debts from the private sector to the government sector.” And “Japan further put MMT into practice”. Must get past this “practice” nonsense and talk about “understanding” and what that understanding enables governments to do.
Talks of the problems of wealth inequality via asset price inflation (and blames that on MMT) but doesn’t see/articulate the conflict between an industrial economy and a financialised rentier economy as being the nub of the matter. QE for asset purchases has been operating instead of QE for productive purposes as has been well made out by Michael Hudson, Richard Werner and others. MMT doesn't exacerbate inequality but the manner of practicing QE does!
Wish economists would give up on trying to turn their field of (scientific) study/theory into the equivalent of a study of fluid mechanics, at least for the time being! Less Isaac Newton, Bernoulli & Co and more sociology/behavioral economics please. Bunch of try-hards.