Friends,
The last time I remember saying more than a sentence about macro was about 2 years ago.
Before that the only real dive into it was reading Jesse’s outstanding paper Upside Down Markets. I read it 3x. It’s the length of a short book so I did a thorough breakdown of it here if you want a condensed version.
A highlight of Jesse’s paper was the use of the Kalecki-Levy “sectoral balances” accounting framework which offers a very organized way to think about economic flows. That framework gained awareness as MMT gained prominence in economic discourse.
MMT or modern monetary theory is called a “heterodox” economic theory. This has nothing to do with what kind of theories it likes to have sex with but just means it’s outside the mainstream. It’s controversial because it’s interpreted as this hyper-Keynesian excuse for the government to spend. Valid concern. But that has less to do with MMT’s descriptive power and more to do with its politics. That said, this problem applies to macro in general. The error bars around macroeconomic theories are far wider than the political battering rams of policy. Policy is always distributional — there are winners and losers. Those contested grounds hold far greater weight to narrow interests and individuals than the economic statistics that roll up to high-level macro summary. [Most economic arguments are politics in disguise.]
I have a friend who manages a pool of capital for a HF-turned-family-office. He’s creative thinker to bounce ideas off. Inquisitive thinker who reflexively considers many angles to a problem before even speaking. When we chat he never asserts anything. And he’s one of those listeners who makes you nervous. His question-to-opinion ratio is like 100-1. The opposite of the incurious, overconfident Mr. My Ways that are overrepresented in finance (which is foremost a sales industry).
I say that because the book I’m going to recommend came from this friend and our back-and-forths on Whatsapp. It’s definitely not a book I would have read if this guy didn’t recommend it. I’m really glad I read it. But for reasons that are probably not why most people pick it up. I’ll get into that but first, the book is called:
The Seven Deadly Innocent Frauds (free download)
There’s a blog post sized version.
And my Kindle highlights.
The book is by the “father of MMT” Warren Mosler.
Reading him is a surreal experience because the extent of conventional misunderstandings of how money works at the macro level seem both comically and tragically disturbing. I’m not talking about his suggestions which are totally contestable but the revelation of how people in power don’t even understand the mechanics of banking and money.
Watching the crypto grifters “do macro” is even more ridiculous when you discover how many fallacies they’ve inhaled. Although the “taxation is theft” argument they spout is closer to the truth than not. This is not a vote for anarchy but the sentiment puts a finger on a strong feeling one gets as they read this short book — just how deeply coercive the contract between a government and its people are. That feeling is cemented as Mosler beats you over the head with a basic identity in a fiat monetary system—taxes have nothing to do with funding expenditures. Zero. (He actually shows this through an experiment you can do at home with your kids to show it…and of course I will be doing it, muahahaha).
Anyway, I recognize that MMT is left-coded and the finance bro who describes himself as “socially liberal and fiscally conservative” would rather compliment a dude on his veiny calves than read a book by Mosler. So let’s see if I can pitch the book with the right hooks.
Here’s why you should read it:
The “sectoral balances” framework has been credited for the late British economist and MMT influence Wynne Godley’s forecasting track record.
Jesse, who is anything but an MMT fan, used that framework to write the prescient Upside Down Markets paper.
Mosler is a trader first. He is a fund manager whose successful arbitrage style of investing shaped his first-principles understanding of how the economy works. The book is short. The 7 “deadly frauds” are covered in about 50 pages and his career memoir comprises 25 pages. He catalogs a fascinating list of trades, including several pioneering bets on lira-denominated bonds, GNMAs, bond futures and cheapest-to-deliver pricing (there’s a neat side-story to those because they were a release valve for the Hunt Brothers’ silver squeeze profits, and subsequent COMEX governance shenanigans that floor traders are aware of). The rich trader to economist to (attempted) politician arc is not one you see every day.
The book is easy and fun to read. Depending on how resigned to cynicism you are, you will laugh as he recounts conversations with famous policy makers and politicians that reveal an unwillingness of prestigious people to get their hands dirty and learn. In some cases, they are quite open about the fact that they are captured by audience. Incentives. It’s always incentives.
It’s worth commenting on Mosler’s leftism. It’s an easy box to put him in through the lens of how how left and right are oriented on the chessboard today in common discourse. But if take a longer view of orientations, his strong pro-markets/small government posture is a degree of sensible nuance that is easy to gloss over in an era where we forward articles after only reading the headline. I think his MMT-flavored recommendations sound like “big government” because his implicit demand is that it is impactful and assertive in a smaller but more focused and well-calibrated role.
You'll walk away realizing how so much of macro is a series of “fallacies of composition” (he uses the paradox of thrift as a classic example which I always appreciate). In fact, the book makes macro seems quite easy. Not as in “I now get it”. I still have lots of questions. But you find that macro effects have a limited amount of outcomes when you see it reduced to accounting identities. To be repetitive, you realize just how much most macro discussions are political ones because they deal with the “distributional effects”. The same macro outcome can map to many ways of slicing the prosperity pie in America and that's really the stuff we argue about. We argue about it as if x or y is good or bad for the economy. By analogy, substitute “league” for economy — nobody cares what’s good for the NFL they are really just wearing team colors.
Maybe that was the most enduring takeaway from the book if you just read between the lines. Whenever you hear people argue macro, just smile and nod. Macro opinions are nothing but political mood rings. You can tell what color they’re feeling when they open your mouth.
A few admin notes about the book:
Like I alluded earlier, the book is 100 pages. The first half covers the 7 deadly financial frauds, the next quarter recounts Mosler's investing career (he’s still active), and the final quarter of the book outlines policy proposals informed by his views. He ran for state office. I barely skimmed the last part.
The book was written in the wake of the GFC. Our problems today look like the opposite of what we were facing then but don’t worry we're equally stupid.
Personal bias note:
I've admit of my George-pilling (this was one of my favorite explorations of a topic in economics) and preference for land value tax to replace much of our overly complex and unjust tax system. I think Mosler’s economic thinking dovetails nicely with Georgist ideals and first principles understanding of economics.
One last thought:
While a deeply enjoyable read it makes the world less joyful to look at. We are bombarded with innocent frauds* because we are lazy and it take effort to learn things but no effort to parrot.
*An “innocent fraud” is a term by John Kenneth Galbraith that inspired Mosler’s title. It refers to misunderstandings that are “sustained by conventional wisdom”. Now you have a term for those crimes of laziness that necessitate yet another buzzy term: Brandolini’s law.
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lots of great points on how the money enters the system to begin with, how taxation creates demand for currency and modulates spend
but in the coupon experiment, the kids are essentially serfs, regardless how taxation is changed they have to pay that tax or receive penalties, you could raise taxes to 100% (a chore every hour) ; they can do nothing else besides chores and they will have to submit or face penalties.
in the real economy aren't participants semi-rational, if you were to raise taxes to 100% there would be no incentive to produce goods or services, you can creates all the coupons in the world, but they aren't that useful unless you have real underlying production. Similarly you would expect more production and spend with the inverse, but less demand for the currency via taxation.