Er... Are you serious, you guys really don't realize that any sanctions on oligarchs and/or government officials only make Putin more popular and stronger? Seems like I spilled a state secret here.
Yes, the Keynesian model for MMT exists, but Keynes could not, and would not, imagine a situation where Russia's access to foreign markets is being effectively strangled, except where foreign buyers have a particular need for Russia's petroleum and natural gas. It is apparent that the Russian economy does not produce sufficient goods and services of acceptable quality on its own to meet demand; and running the ruble printing presses 24/7 is not likely to make what is available, albeit at much higher prices, any more so. Instead, the analogy that most immediately comes to mind is that of a star that exhausts its finite supply of hydrogen. As heavier elements are created, the core heats up until the inevitable explosion occurs. Actually, the star collapses on itself, which renders the simile even more apt.
Similarly, an autarky that Russia aspires to be will soon consume itself, because it lacks the capacity for either domestic or foreign investment. As long as Vladimir Putin has a stranglehold on Russia's statecraft, Russia will be a pariah state no matter what natural resources it currently controls. The world saw what happened when the Soviet Union devolved into a kleptocratic Russia, with its former satellites joining the world of free markets. If Russia is prohibited from marketing its oil and gas abroad, there will be no foreign exchange that represents real value. A fiat currency that is subject to external political pressures such as what occurred in the Rhineland during the 1920s is likely to repeat the experience of the hyperinflation that wiped out the German middle-class.
Banks are printing presses. They lend money against real things - like inventory - so you can spend those real things sooner than you would be able to if you had to sell them first. That’s how capitalism accelerates growth.
MMT is about realising money isn’t the constraining factor and that, if set up properly, the system can be allowed to allocate funds automatically to ensure everything that can be done within a currency area will be done.
We’ve just got rid of international competitors to Russian producers - who will now expand and get better.
Particularly as they can now effectively ignore any Western IP claims.
You must not have been following the news reports. Russia's access to foreign exchange is kaput, the stock market is closed, and the ruble is in free fall. Theory meeting practical consequences equals a head on collision, with whatever might remain of theory a smoking wreck.
Very interesting read. I am not an economist so am not able to follow all the nuances but had what I think is a similar thought, perhaps a little too simplistic. In the most free of circumstances there was very little indication that oligarchs, even collectively, had any control over Putin. Now that the oligarchs are severely weakened by the sanctions, does that reduce their ability to influence Putin even further? I would think yes.
I think this points to what others have already said, what is the likely impact of the sanctions. Will they impact Putin’s regime? I am not so sure. I think it is much more likely Cold War 2, including Iron Curtain 2. Everyone takes their marbles and goes home.
I don't think that's a viable solution given that Putin made it clear that he intends to re-configure the world order, irrespective of whether the countries he requires are NATO members.
In the USSR days, high value "manufactured goods" were manufactured in the West (US, UK, Germany, etc).
Today, most "manufactured goods" actually come from China - only leading edge technology products (e.g. Machine Tools, Jet Engines, etc) and luxury goods (fashion, movies, etc) come from the US/EU.
The thing about technology, with enough determination (and withdrawal from TRIPS), they can build their own. These will lag by a couple of generations (2-5 years), but at this point of technology development a 2-5 year lag is bearable.
With respect to the luxury goods, sure some people will miss their Luis Vuitton and Prada - but not all that much. On the entertainment side, withdrawal from TRIPS would laws to cancel all foreign IP rights, so copies will readily proliferate.
Thus, as long as they retain China's support - they are fine.
On the other hand if you include East Ukraine, they produce:
90% of the world's Neon (critical for lasers and semiconductor manufacturing)
40% of palladium (necessary for catalytic converters)
35-40% of Boeing's titanium and over 50% Airbus’s
That gives them a lot of leverage - TSMC announced that they wont ship semiconductors to Russia. But will they maintain that ban when they run out of Neon?
I think you may have hit the nail on the head here as to why Putin is doing this. He is not mad. He is reordering things and asserting his authority. He is calling out the economic orthodoxies of the post-Soviet era and he will likely change the way we all live and work together because all of the assumptions are collapsing quicker than our economical model told us was possible.
The quicker we realize this and react to what he is doing anticipating the second and third order effects rather than just posturing and congratulating ourselves the better.
I'm not saying this is "why" - the "why" is more complex yet perfectly clear in one looks at the history of NATO and the region.
What I am describing are Putin's possible reasons for thinking he has a chance to change the rules of the game.
I suspect that the reason countries that comprise over 50% of the world's population abstained from the UN vote to censure Russia, and that major states like China, India, Brazil, Pakistan, UAE etc. are refusing to sign up to the sanction regime is that they are also hoping to see a change in the rules.
Will they? Time will tell, but the points made here are not a good sign for the US:
What MMT actually says is not that governments that issue their own currency have a choice to either tax, borrow or print but that there is ONLY ONE WAY to spend and that is the last of those three. So there is no way russia or any other state for that matter could "turn to MMT" or "start doing MMT" or something like that. They are all already spending the way MMT describes it and they also did exactly that way in the past and MMT does NOT say "well, you could also start to print more money" at all.
Taxation can not fund spending as you can only tax what was spent first (or borrowed first through the central bank when banks refinance their lending at the central bank). So taxes destroy money that was created by prior spending/borrowing. Also taxes are collected in reserves and when private persons pay taxes the private banks acts as an intermediary so every unit taxed must have come from the central bank to begin with.
Bond issuance does not "fund" spending as well. Bonds are sold to the primary dealers only and in reserves only. The only accounts involved in that are the reserve accounts of the primary dealers and the treasury. No private bank account is touched when bonds are issued. It's just an asset swap (that can be reversed by the central bank through socalled open market operations). And it is done to help the CB maintain the interest rate target.
But after the bond issuance if the government actually spends this is the only point at which private bank accounts are affected. And they are affected by increasing their balances effectively creating new additional money. Taxes on the other hand destroy money by decreasing balances on private bank accounts (and the banks reserve accounts simultaniously).
So it is totally clear that any government spending creates balances in the private sector and taxation destroys them. But the government also never waits for taxes to come in if it wants to spend. If its reserve account does not have enough funds to spend what was decided upon in the budget it simply swaps assets with the banks (bond issuance to primary dealers) and then spends. It doesn't "wait" for "tax income" at all. Anyways the "tax income" isn't even known in advance it is just estimated and depends on how well the economy will perform in that year. Only at the end of the year it will be clear if the budget required deficit spending in aggregate or not.
More and more goods and service are disappearing from Russia as well as human capital does day by day,which run counter to the recommended MMT prescription.
Debt may not be a constraint for Russia in using MMT but inflation and the balance of payments are constraints. On inflation there is already a tension between raising interest rates to increase demand for ruble deposits and making liquidity available to head off bank runs. On the BoP, its very difficult to tell what the post-sanctions BoP will look like, but it would be surprising if Russia had unlimited flexibility. Whether it wants to impress the rest of the world or not, there is still a good case for orthodoxy in macroeconomic policies.
Forgive my ignorance, but surely an aggressive sanctions policy is all about shutting off supply (of goods and hard currency)? No matter how much domestic monetary demand stimulus is or isn’t applied, if the goods aren’t available, economic activity still implodes, unless there exists a domestic substitute.
We’ve just eliminated the competitors to Russian firms, handed them the sales and stolen the foreign savings of the Russian middle class which they used to buy imports.
What is that demand likely to do to Russian firms? Cause them to expand - which can be funded by Russian banks in their own currency until the cows come home.
Isn't the main issue for them things, products and services that cant be delivered due to sanctions. Hence the cash situation is messa relevant than the ability to produce things for the population.
This is far beyond my understanding of economics, but isn't China the wild card? If imports and exports are further constricted (and this is very much TBD) and China doesn't pick up the slack, will it matter which theory is pursued? Forgive me if this question itself is ignorant.
Ok. So here are three things I'm sure cognoscenti would reaffirm:
1. MMT is an elaborate hoax that only holds when rates are close to zero. It's easy to dismantle it, if one knows that for all relevant intents and purposes its central tenet, i.e. that the CB is part of government, is false. Btw, currently the key rate of the Russian CB is 20%.
2. In a non-zero-rate environment, the CB can buy govt debt only for so long before inflation will eat away the gains at macro level. And the level of gains depends on the quality of fiscal policy. Once inflation is entrenched in expectations, the monetary tightening would have to be disproportionate to break the spiral. This all can take a while under normal circumstances. Given the current external constraints imposed on the Russian economy, however, such effects would be immediate.
3. Given the scale of deployed sanctions (several of which did not even bite yet in full), money becomes quasi-irrelevant. Russia just made a leap towards a fully closed economy, like N-Korea, they just don't know it yet. Why should they start printing money if they can't buy many of the things they would want? – Russia is not a market economy anymore and conventional wisdom doesn't apply.
But what makes you think Putin would care about the state of the Russian economy anyway? – I’d posit that so far all evidence is to the contrary.
MMT is constrained by resource availability (supply). The core of MMT is that government takes over credit creation from banks, and manages it directly (keeping the quasi-seigniorage that is the source of bank profits).
In such a situation, inflation (which represents excess monetary demand - i.e. there is more money in the system than goods available for purchase with that money) can be controlled by directly limiting credit availability (increasing reserve/offset requirements) or increasing taxes (since "free money" available to chase goods is the money not being set aside for payment of taxes).
Do I understand you to imply that the BoR / Congress has now undertaken the necessary actions in the credit markets (raising interest rates, capital controls, closing stock market exchange, ruble control, foreign capital goods control, etc.) that along with new taxes on the Russian population, will forestall any significant inflation?
If so, what would be your inflation forecast estimate for Russian year-on year 2022-2023?
I don't know what they have or haven't actually done. My comment is more by way of explanation of what they COULD do if suitably committed - and you don't get more committed than in a war that is coupled with enforced isolation.
So, in that context, they can run the banks by "administrative fiat" (or just expropriate them), in which case they can print all the money they need to route people (and other resources) into the functional roles they need performed.
If at any time they find that they printed so much money that they are threatened by inflation (i.e. there is competition between the money they are using to direct the economy and the money the wealthier people have in their hands and are trying to spend on having "resources" do something other than what the government needs - they can suck that money out of the system by raising taxes.
Again, this is not a comment on policy and its implementation, just an explanation of how the government controls (prevents?) excess inflation under an MMT framework.
To bring it back home:
traditionally (like in the US) the way to tamp down inflation is to take money out of circulation (competition for resources) is to increase rates so that people save more and borrow less.
under MMT, the way to tamp down inflation is to take money out of circulation by getting people to pay it to the government as taxes (or to put it aside - aka "save" it - to pay taxes later.
Just a different mechanism for dealing with a particular problem.
I agree with your MMT description, and prescriptively I am guessing that the BoR + Congress may be forced into quasi / outright MMT policies resulting from the war, which will force the required demand destruction, as evidenced by the policy changes since the sanctions began. We have yet to learn if Putin will raise corporate and individual taxes; maybe more blood and treasure needs to be spent by the invaders.
If the USA is expecting added inflationary pressure, how much more so Russia? Below are two articles that discuss some of the factors.
I wasn't actually predicting that they WOULD raise taxes, merely that they COULD if they needed to bring inflation under control.
What we call inflation is really a combination of two elements - a real one and a "financial" one.
The real one is that as technological change takes place differentially across sectors, relative prices change (e.g. the cost a massage relative to the cost of a TV has increased), and to avoid having to lower prices we accommodate this realignment by allowing prices of the things which didn't get a productivity improvement to rise. Because the changes in relative prices encourage consumption to move towards the things that didn't go up in price (became relatively cheaper), the overall price level goes up only a little (2% tp 4% in places that manage this well like Australia).
The "financial" one is what happens when the amount of money available to buy stuff grows faster than the availability of stuff to buy.
This "excess money chasing scarce goods" is the type of inflation to avoid, because all it does is distort decision making.
The traditional economic view is that such increase in money can takes place only when the Central Bank makes too much money available, and thus must be reversed by "tightening" monetary policy.
The MMT view is that there is no difference between a Central Bank increasing money supply (issuing more $US into the banking system) and normal banks increasing credit availability (like by creating new derivative instruments that allow greater leverage).
The relevance to Russia is that whether they will have inflation is unclear. Certainly some goods (e.g. Apple phones) will go up in price. But other things may become cheaper if Russia can source unbranded versions (from China) or create local equivalents. In a "fortress" environment where people don't want to leave due to outside hostility, much is possible, so the overall result is very inclear.
As for the articles, the FT one is paywalled, but the other is somewhat misleading (probably not deliberately, but nonetheless).
His whole thesis is built on the premise of a wave of inflation over (as he writes) "mid-1960s through the end of the 1980s". A brief perusal of the actual inflation rates over that period shows that this just didn't happen.
There were only two inflationary periods (where inflation was over 7%), Aug 74 to Nov 75 and May 78 to Feb 82. These coincided EXACTLY with the First Oil Shock (oil went from 4.75 in 1974 to 12.21 in 1975) and the Second Oil Shock (oil went from 14.40 in 1977 to 37.32 in 1980). These changes would obviously affect relative costs and needed inflation to allow more gentle adjustment. For various (political) reasons, the US and Volcker went for the faster but more painful adjustment, but some of the consequences of it remain with us (e.g. in the form of weaker unions).
Sure, the fall in the oil price hit the USSR hard, but the real cause of the collapse is that Gorbachev (and perhaps more importantly, the people he surrounded himself with) just didn't have the skills and abilities to implement the "perestroika" he envisaged. The fact that he chose to take advice from the "economics" equivalents of the "strategy" people who managed US's adventures in Iraq and Afghanistan did not help.
I think it is always helpful (at least in the short/medium term) to separate "competence" from "ideology". It is the failure to pay attention to this distinction that gets a lot of people into trouble when they make forecasts, because wherever someone thinks of Putin's or Xi's ideologies, one thing no one can credibly cant say about either is that they lack competence.
If some random guy on Twitter or a comment thread (like me) can think through a logical strategic framework - so can they and their advisors.
Thanks Adam. You give good arguments why the international sanctions regime against Russia can be undermined with Keynesian monetary and fiscal policy as recommended by the MMT community. Bad outlook for the alliance against Putin :-( Unfortunately, I couldn't join yesterdays webinar organized by Finanzwende and Heinrich-Boell foundation
Er... Are you serious, you guys really don't realize that any sanctions on oligarchs and/or government officials only make Putin more popular and stronger? Seems like I spilled a state secret here.
Yes, the Keynesian model for MMT exists, but Keynes could not, and would not, imagine a situation where Russia's access to foreign markets is being effectively strangled, except where foreign buyers have a particular need for Russia's petroleum and natural gas. It is apparent that the Russian economy does not produce sufficient goods and services of acceptable quality on its own to meet demand; and running the ruble printing presses 24/7 is not likely to make what is available, albeit at much higher prices, any more so. Instead, the analogy that most immediately comes to mind is that of a star that exhausts its finite supply of hydrogen. As heavier elements are created, the core heats up until the inevitable explosion occurs. Actually, the star collapses on itself, which renders the simile even more apt.
Similarly, an autarky that Russia aspires to be will soon consume itself, because it lacks the capacity for either domestic or foreign investment. As long as Vladimir Putin has a stranglehold on Russia's statecraft, Russia will be a pariah state no matter what natural resources it currently controls. The world saw what happened when the Soviet Union devolved into a kleptocratic Russia, with its former satellites joining the world of free markets. If Russia is prohibited from marketing its oil and gas abroad, there will be no foreign exchange that represents real value. A fiat currency that is subject to external political pressures such as what occurred in the Rhineland during the 1920s is likely to repeat the experience of the hyperinflation that wiped out the German middle-class.
China
Banks are printing presses. They lend money against real things - like inventory - so you can spend those real things sooner than you would be able to if you had to sell them first. That’s how capitalism accelerates growth.
MMT is about realising money isn’t the constraining factor and that, if set up properly, the system can be allowed to allocate funds automatically to ensure everything that can be done within a currency area will be done.
We’ve just got rid of international competitors to Russian producers - who will now expand and get better.
Particularly as they can now effectively ignore any Western IP claims.
You must not have been following the news reports. Russia's access to foreign exchange is kaput, the stock market is closed, and the ruble is in free fall. Theory meeting practical consequences equals a head on collision, with whatever might remain of theory a smoking wreck.
Whoever was sitting around a couple of years ago wishing REALLY HARD for "Interesting Times" has overshot the mark.
Very interesting read. I am not an economist so am not able to follow all the nuances but had what I think is a similar thought, perhaps a little too simplistic. In the most free of circumstances there was very little indication that oligarchs, even collectively, had any control over Putin. Now that the oligarchs are severely weakened by the sanctions, does that reduce their ability to influence Putin even further? I would think yes.
I think this points to what others have already said, what is the likely impact of the sanctions. Will they impact Putin’s regime? I am not so sure. I think it is much more likely Cold War 2, including Iron Curtain 2. Everyone takes their marbles and goes home.
I don't think that's a viable solution given that Putin made it clear that he intends to re-configure the world order, irrespective of whether the countries he requires are NATO members.
Sure he can re configure it. Just like Soviet Union dealt with quite a few countries, just not the West.
You seem oblivious to the elephant in the room.
In the USSR days, high value "manufactured goods" were manufactured in the West (US, UK, Germany, etc).
Today, most "manufactured goods" actually come from China - only leading edge technology products (e.g. Machine Tools, Jet Engines, etc) and luxury goods (fashion, movies, etc) come from the US/EU.
The thing about technology, with enough determination (and withdrawal from TRIPS), they can build their own. These will lag by a couple of generations (2-5 years), but at this point of technology development a 2-5 year lag is bearable.
With respect to the luxury goods, sure some people will miss their Luis Vuitton and Prada - but not all that much. On the entertainment side, withdrawal from TRIPS would laws to cancel all foreign IP rights, so copies will readily proliferate.
Thus, as long as they retain China's support - they are fine.
On the other hand if you include East Ukraine, they produce:
90% of the world's Neon (critical for lasers and semiconductor manufacturing)
40% of palladium (necessary for catalytic converters)
35-40% of Boeing's titanium and over 50% Airbus’s
That gives them a lot of leverage - TSMC announced that they wont ship semiconductors to Russia. But will they maintain that ban when they run out of Neon?
This really isn't 1990.
I think you may have hit the nail on the head here as to why Putin is doing this. He is not mad. He is reordering things and asserting his authority. He is calling out the economic orthodoxies of the post-Soviet era and he will likely change the way we all live and work together because all of the assumptions are collapsing quicker than our economical model told us was possible.
The quicker we realize this and react to what he is doing anticipating the second and third order effects rather than just posturing and congratulating ourselves the better.
I'm not saying this is "why" - the "why" is more complex yet perfectly clear in one looks at the history of NATO and the region.
What I am describing are Putin's possible reasons for thinking he has a chance to change the rules of the game.
I suspect that the reason countries that comprise over 50% of the world's population abstained from the UN vote to censure Russia, and that major states like China, India, Brazil, Pakistan, UAE etc. are refusing to sign up to the sanction regime is that they are also hoping to see a change in the rules.
Will they? Time will tell, but the points made here are not a good sign for the US:
www.wsj.com/articles/if-currency-reserves-arent-really-money-the-world-is-in-for-a-shock-11646311306
Still, we will see what happens.
What MMT actually says is not that governments that issue their own currency have a choice to either tax, borrow or print but that there is ONLY ONE WAY to spend and that is the last of those three. So there is no way russia or any other state for that matter could "turn to MMT" or "start doing MMT" or something like that. They are all already spending the way MMT describes it and they also did exactly that way in the past and MMT does NOT say "well, you could also start to print more money" at all.
Taxation can not fund spending as you can only tax what was spent first (or borrowed first through the central bank when banks refinance their lending at the central bank). So taxes destroy money that was created by prior spending/borrowing. Also taxes are collected in reserves and when private persons pay taxes the private banks acts as an intermediary so every unit taxed must have come from the central bank to begin with.
Bond issuance does not "fund" spending as well. Bonds are sold to the primary dealers only and in reserves only. The only accounts involved in that are the reserve accounts of the primary dealers and the treasury. No private bank account is touched when bonds are issued. It's just an asset swap (that can be reversed by the central bank through socalled open market operations). And it is done to help the CB maintain the interest rate target.
But after the bond issuance if the government actually spends this is the only point at which private bank accounts are affected. And they are affected by increasing their balances effectively creating new additional money. Taxes on the other hand destroy money by decreasing balances on private bank accounts (and the banks reserve accounts simultaniously).
So it is totally clear that any government spending creates balances in the private sector and taxation destroys them. But the government also never waits for taxes to come in if it wants to spend. If its reserve account does not have enough funds to spend what was decided upon in the budget it simply swaps assets with the banks (bond issuance to primary dealers) and then spends. It doesn't "wait" for "tax income" at all. Anyways the "tax income" isn't even known in advance it is just estimated and depends on how well the economy will perform in that year. Only at the end of the year it will be clear if the budget required deficit spending in aggregate or not.
More and more goods and service are disappearing from Russia as well as human capital does day by day,which run counter to the recommended MMT prescription.
Numerous articles on dr google. They raised prices by 50%, but not the point
A bit of a higher order reality that Xi and Putin may have considered in more depth than the hypersanctioning West:
Rail transport via China-Kazakhstan-Russia-Belorus may be more, even much more, secure from attack than ocean shipping.
This may also help explain Putin’s quick response and pulverization of unrest in Kazakhstan.
Debt may not be a constraint for Russia in using MMT but inflation and the balance of payments are constraints. On inflation there is already a tension between raising interest rates to increase demand for ruble deposits and making liquidity available to head off bank runs. On the BoP, its very difficult to tell what the post-sanctions BoP will look like, but it would be surprising if Russia had unlimited flexibility. Whether it wants to impress the rest of the world or not, there is still a good case for orthodoxy in macroeconomic policies.
Forgive my ignorance, but surely an aggressive sanctions policy is all about shutting off supply (of goods and hard currency)? No matter how much domestic monetary demand stimulus is or isn’t applied, if the goods aren’t available, economic activity still implodes, unless there exists a domestic substitute.
We’ve just eliminated the competitors to Russian firms, handed them the sales and stolen the foreign savings of the Russian middle class which they used to buy imports.
What is that demand likely to do to Russian firms? Cause them to expand - which can be funded by Russian banks in their own currency until the cows come home.
Isn't the main issue for them things, products and services that cant be delivered due to sanctions. Hence the cash situation is messa relevant than the ability to produce things for the population.
So I guess we'll see if inflation takes off in Russia.
This is far beyond my understanding of economics, but isn't China the wild card? If imports and exports are further constricted (and this is very much TBD) and China doesn't pick up the slack, will it matter which theory is pursued? Forgive me if this question itself is ignorant.
Ok. So here are three things I'm sure cognoscenti would reaffirm:
1. MMT is an elaborate hoax that only holds when rates are close to zero. It's easy to dismantle it, if one knows that for all relevant intents and purposes its central tenet, i.e. that the CB is part of government, is false. Btw, currently the key rate of the Russian CB is 20%.
2. In a non-zero-rate environment, the CB can buy govt debt only for so long before inflation will eat away the gains at macro level. And the level of gains depends on the quality of fiscal policy. Once inflation is entrenched in expectations, the monetary tightening would have to be disproportionate to break the spiral. This all can take a while under normal circumstances. Given the current external constraints imposed on the Russian economy, however, such effects would be immediate.
3. Given the scale of deployed sanctions (several of which did not even bite yet in full), money becomes quasi-irrelevant. Russia just made a leap towards a fully closed economy, like N-Korea, they just don't know it yet. Why should they start printing money if they can't buy many of the things they would want? – Russia is not a market economy anymore and conventional wisdom doesn't apply.
But what makes you think Putin would care about the state of the Russian economy anyway? – I’d posit that so far all evidence is to the contrary.
I reject your #1.
MMT is supposedly constrained by inflation.
The forecast is for considerable Russian inflation following the sanctions, for a considerable period if the war drags on.
How might the BoR respond to such developments?
MMT is constrained by resource availability (supply). The core of MMT is that government takes over credit creation from banks, and manages it directly (keeping the quasi-seigniorage that is the source of bank profits).
In such a situation, inflation (which represents excess monetary demand - i.e. there is more money in the system than goods available for purchase with that money) can be controlled by directly limiting credit availability (increasing reserve/offset requirements) or increasing taxes (since "free money" available to chase goods is the money not being set aside for payment of taxes).
Thank you, SB.
Do I understand you to imply that the BoR / Congress has now undertaken the necessary actions in the credit markets (raising interest rates, capital controls, closing stock market exchange, ruble control, foreign capital goods control, etc.) that along with new taxes on the Russian population, will forestall any significant inflation?
If so, what would be your inflation forecast estimate for Russian year-on year 2022-2023?
Steve R.
I don't know what they have or haven't actually done. My comment is more by way of explanation of what they COULD do if suitably committed - and you don't get more committed than in a war that is coupled with enforced isolation.
So, in that context, they can run the banks by "administrative fiat" (or just expropriate them), in which case they can print all the money they need to route people (and other resources) into the functional roles they need performed.
If at any time they find that they printed so much money that they are threatened by inflation (i.e. there is competition between the money they are using to direct the economy and the money the wealthier people have in their hands and are trying to spend on having "resources" do something other than what the government needs - they can suck that money out of the system by raising taxes.
Again, this is not a comment on policy and its implementation, just an explanation of how the government controls (prevents?) excess inflation under an MMT framework.
To bring it back home:
traditionally (like in the US) the way to tamp down inflation is to take money out of circulation (competition for resources) is to increase rates so that people save more and borrow less.
under MMT, the way to tamp down inflation is to take money out of circulation by getting people to pay it to the government as taxes (or to put it aside - aka "save" it - to pay taxes later.
Just a different mechanism for dealing with a particular problem.
SB,
I agree with your MMT description, and prescriptively I am guessing that the BoR + Congress may be forced into quasi / outright MMT policies resulting from the war, which will force the required demand destruction, as evidenced by the policy changes since the sanctions began. We have yet to learn if Putin will raise corporate and individual taxes; maybe more blood and treasure needs to be spent by the invaders.
If the USA is expecting added inflationary pressure, how much more so Russia? Below are two articles that discuss some of the factors.
https://www.linkedin.com/pulse/inflation-during-second-cold-war-edward-yardeni/?trk=eml-email_series_follow_newsletter_01-hero-1-title_link&midToken=AQGcW3-w741TXA&fromEmail=fromEmail&ut=3VHlR9wAI9JW81
-----------------
https://www.ft.com/content/36c76a56-3431-4ced-8a05-a7a904bc348b
I wasn't actually predicting that they WOULD raise taxes, merely that they COULD if they needed to bring inflation under control.
What we call inflation is really a combination of two elements - a real one and a "financial" one.
The real one is that as technological change takes place differentially across sectors, relative prices change (e.g. the cost a massage relative to the cost of a TV has increased), and to avoid having to lower prices we accommodate this realignment by allowing prices of the things which didn't get a productivity improvement to rise. Because the changes in relative prices encourage consumption to move towards the things that didn't go up in price (became relatively cheaper), the overall price level goes up only a little (2% tp 4% in places that manage this well like Australia).
The "financial" one is what happens when the amount of money available to buy stuff grows faster than the availability of stuff to buy.
This "excess money chasing scarce goods" is the type of inflation to avoid, because all it does is distort decision making.
The traditional economic view is that such increase in money can takes place only when the Central Bank makes too much money available, and thus must be reversed by "tightening" monetary policy.
The MMT view is that there is no difference between a Central Bank increasing money supply (issuing more $US into the banking system) and normal banks increasing credit availability (like by creating new derivative instruments that allow greater leverage).
The relevance to Russia is that whether they will have inflation is unclear. Certainly some goods (e.g. Apple phones) will go up in price. But other things may become cheaper if Russia can source unbranded versions (from China) or create local equivalents. In a "fortress" environment where people don't want to leave due to outside hostility, much is possible, so the overall result is very inclear.
As for the articles, the FT one is paywalled, but the other is somewhat misleading (probably not deliberately, but nonetheless).
His whole thesis is built on the premise of a wave of inflation over (as he writes) "mid-1960s through the end of the 1980s". A brief perusal of the actual inflation rates over that period shows that this just didn't happen.
There were only two inflationary periods (where inflation was over 7%), Aug 74 to Nov 75 and May 78 to Feb 82. These coincided EXACTLY with the First Oil Shock (oil went from 4.75 in 1974 to 12.21 in 1975) and the Second Oil Shock (oil went from 14.40 in 1977 to 37.32 in 1980). These changes would obviously affect relative costs and needed inflation to allow more gentle adjustment. For various (political) reasons, the US and Volcker went for the faster but more painful adjustment, but some of the consequences of it remain with us (e.g. in the form of weaker unions).
Sure, the fall in the oil price hit the USSR hard, but the real cause of the collapse is that Gorbachev (and perhaps more importantly, the people he surrounded himself with) just didn't have the skills and abilities to implement the "perestroika" he envisaged. The fact that he chose to take advice from the "economics" equivalents of the "strategy" people who managed US's adventures in Iraq and Afghanistan did not help.
I think it is always helpful (at least in the short/medium term) to separate "competence" from "ideology". It is the failure to pay attention to this distinction that gets a lot of people into trouble when they make forecasts, because wherever someone thinks of Putin's or Xi's ideologies, one thing no one can credibly cant say about either is that they lack competence.
If some random guy on Twitter or a comment thread (like me) can think through a logical strategic framework - so can they and their advisors.
Thanks Adam. You give good arguments why the international sanctions regime against Russia can be undermined with Keynesian monetary and fiscal policy as recommended by the MMT community. Bad outlook for the alliance against Putin :-( Unfortunately, I couldn't join yesterdays webinar organized by Finanzwende and Heinrich-Boell foundation