Interesting article especially if you have studied MMT

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Small government has been dead for 50 years at a minimum.


Reagan destroyed it with his “starve the beast” bullshit. It gave the party of small government free reign to expand government size and reach on all fronts (all for free!).


Good article and it will cause me to think hard about my investment portfolio. It remains to be seen if the old guard is willing to stop thinking of the national debt as the same thing as a individual’s personal debt.

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I agree that the national debt is not the same as individual’s personal debt.
But, I’m one of the old fogies who still think it matters.

Some of the debt is essentially currency circulating in the US. Individuals do not issue their own currency.
Some of the debt is inter-government borrowing. Most individuals do not set up separate accounts and have one borrow from another.
Some of the debt is owned to US citizens. In theory, the gov’t could tax their debt away. Individuals can’t do that.
The US is not planning to stop producing stuff in the future. Individuals want to save because they hope to someday stop producing but continue to consumes.

Some of the debt is owed to foreigners. It is a claim on future federal revenue, which in turn arises from US production. That is more like an individual’s personal debt.
We can make that debt “more manageable” by growing our economy, roughly like individuals growing their incomes.

If all our debt were owed to foreigners, we could imagine simply defaulting on it. There is no world government to make us pay. We’ve got our own big army.
But, the debt owned to US citizens is intermixed with debt owned to foreigners. The economic costs of defaulting on it are huge. Similarly, we can’t simply print money indefinitely to pay the debt, or to reduce the debt burden.

We’ve been able to borrow because we’re the world’s biggest economy, foreigners believe there will be enough there to pay them. That won’t always be the fact.
International lenders famously have a herd mentality. When some critical mass of them lose faith in the ability of a gov’t to repay with hard money, they all rush for the door at the same time.

Of course, JMO. I haven’t read the rapidly filling bookshelf on MMT.

Here is another article, one where a physicist claims to prove that MMT is “wrong.”

In case you are out of feebies:


The proposition is about as outlandish as it sounds: Everything we know about modern economics is wrong.

And the man who says he can prove it doesn’t have a degree in economics.

But Ole Peters is no ordinary crank. A physicist by training, his theory draws on research done in close collaboration with the late Nobel laureate Murray Gell-Mann, father of the quark. He’s also won over two noted thinkers in the world of finance — Nassim Nicholas Taleb and Michael Mauboussin — not to mention a groundswell of enthusiastic supporters in the Twittersphere.

His beef is that all too often, economic models assume something called “ergodicity.” That is, the average of all possible outcomes of a given situation informs how any one person might experience it. But that’s often not the case, which Peters says renders much of the field’s predictions irrelevant in real life. In those instances, his solution is to borrow math commonly used in thermodynamics to model outcomes using the correct average.

If Peters is right — and it’s a pretty ginormous if — the consequences are hard to overstate. Simply put, his “fix” would upend three centuries of economic thought, and reshape our understanding of the field as well as everything it touches, from risk management to income inequality to how central banks set interest rates and even the use of behavioral economics to fight Covid-19.

“The problem is that much of academic economics has gone off the rails,” Peters, lead researcher of the London Mathematical Laboratory’s economics program, wrote in an email. “We can trace back the reasons for this to the 17th century, but it’s important, first of all, to state clearly that something is not the way it should be, and that any statements coming from economics must be evaluated carefully because they may be based on flawed reasoning.”

Peters is far from the first to play the part of the outsider coming to bravely save economics from itself. There’s even a joke among economists that every few years, a physicist stumbles into the field, looks at the math and declares that none of it makes sense (and then tries in vain to fix it). He concedes his ideas haven’t gotten very far with actual economists. Many have either rejected them outright or dismissed them as nothing more than a willful misunderstanding of the facts. (More on that later.)

Ole Peters, right, with Murray Gell-Mann at Santa Fe Institute in 2011

Photographer: Laura Ware/Santa Fe Institute

Yet despite what dyed-in-the-wool economists might think, he’s developed a wide and devoted online following since his paper “The Ergodicity Problem in Economics” was published late last year. Next month, his institute will hold a virtual conference on all things related to Peters’ work, from explainers to implications for fields as varied as finance and medicine. It has already attracted over 500 attendees from around the world, even a few economists.

Peters takes aim at expected utility theory, the bedrock that modern economics is built on. It explains that when we make decisions, we conduct a cost-benefit analysis and try to choose the option that maximizes our wealth.

The problem, Peters says, is the model fails to predict how humans actually behave because the math is flawed. Expected utility is calculated as an average of all possible outcomes for a given event. What this misses is how a single outlier can, in effect, skew perceptions. Or put another way, what you might expect on average has little resemblance to what most people experience.

Consider a simple coin-flip game, which Peters uses to illustrate his point.

The day’s biggest storiesGet caught up with the Evening Briefing.

Starting with $100, your bankroll increases 50% every time you flip heads. But if the coin lands on tails, you lose 40% of your total. Since you’re just as likely to flip heads as tails, it would appear that you should, on average, come out ahead if you played enough times because your potential payoff each time is greater than your potential loss. In economics jargon, the expected utility is positive, so one might assume that taking the bet is a no-brainer.

Yet in real life, people routinely decline the bet. Paradoxes like these are often used to highlight irrationality or human bias in decision making. But to Peters, it’s simply because people understand it’s a bad deal.

Flip a Coin?

Even with increased payouts for winning flips, and a 50-50 chance of landing on heads each time, the game is a loser

Source: Bloomberg

Note: Assumes a $100 bankroll to start.

Here’s why. Suppose in the same game, heads came up half the time. Instead of getting fatter, your $100 bankroll would actually be down to $59 after 10 coin flips. It doesn’t matter whether you land on heads the first five times, the last five times or any other combination in between.

The “likeliest” outcome of the 50-50 proposition would still leave you with $41 less in your pocket.

Start with $100, End with $59

In Peters’s coin flip game, the end result is always the same, regardless of when you land on heads or tails

Source: Bloomberg

Note: Each player starts with $100. Landing on heads results in a 50% increase in wealth. Tails results in 40% loss. The game assumes players will land on heads half the time and tails half the time given a large enough sample.

Now, say 10,000 people played 100 times each, without assuming all players land on heads exactly 50% of the time. (This mimics what happens in real life, where outcomes often diverge dramatically from the mean.)

Well, in that case, one lucky gambler would end up with $117 million and accrue more than 70% of the group’s wealth, according to a natural simulation run by Jason Collins, the former head of behavioral economics for PwC in Australia who has written extensively about Peters’ research. The average expected payout, pulled up by a lucky few, would still be a hefty $16,000.

But tellingly, over half the players wind up with less than a dollar.

“For most people, the series of bets is a disaster,” Collins wrote. “It looks good only on average, propped up by the extreme good luck” of just a handful of players.

While Peters employs plenty of high-level math to make his case, an experiment by a group of neuroscientists in Copenhagen also put his theory to the test. And in the lab, people changed their willingness to take risks when the circumstances changed, in ways his equations anticipated, even when classical economic theory suggested that doing so would be considered irrational.

“There’s a sense that ergodicity economics can’t possibly be right because it’s too simple,” said Oliver Hulme, one of the experiment’s designers. However, it “made a very bold, falsifiable prediction” that stood up, he said.

Peters asserts his methods will free economics from thinking in terms of expected values over non-existent parallel universes and focus on how people make decisions in this one. His theory will also eliminate the need for the increasingly elaborate “fudges” economists use to explain away the inconsistencies between their models and reality.

And according to Peters, one of those “fudges” just happens to be the entire field of behavioral economics, which has won widespread acclaim — not to mention a couple of Nobel Prizes — over the past decade for explaining all the mind-bending ways people don’t act rationally. Instead, he says the field might be better explained as a symptom of economics’ lack of formal rigor.

It’s no surprise that economists haven’t quite embraced Peters’ point of view. Numerous economics journals have rejected his paper on the basis that it simply wouldn’t be of interest to their readers.

Benjamin Golub, an economics professor at Harvard University, is less charitable. He lambasts Peters for misunderstanding the economic theory behind decision making and says Peters’ work ultimately amounts to little more than a straw-man argument that solves a narrow set of problems that already had well-known solutions.

Physicists, according to xkcd

“Peters’ thesis is that he has discovered a hidden assumption of economic theory that undermines its validity, but it’s not there,” he wrote in an email. Even if Peters wasn’t “confused” about the content, Golub says “he would still be off the mark understanding what its remaining open problems are. That is part of the reason no expert takes him seriously.”

Nevertheless, Peters’ theory has earned plenty of praise from heavyweights outside of economics. Taleb, of “Black Swan” fame, has promoted Peters’ work on Twitter and in his own scientific papers, and has called his findings “100% correct.”

Mauboussin, the former head of global financial strategies at Credit Suisse, Rick Bookstaber, a former risk manager at Bridgewater who helped draft the Volcker Rule while serving at the SEC and U.S. Treasury, and Emanuel Derman, a pioneer of quantitative investing, have also supported Peters’ research on ergodicity economics.

His paper, which ultimately found a place in the prestigious Nature Physics journal, quickly became one of its most popular. (For what it’s worth, his work has even inspired a hardboiled, German-language thriller titled Gier, about a man who was murdered for his incendiary ideas about economics.)

“The notion of utility may exist, but not in the way the psychologists and economists have modeled it,” Taleb said. “The results are monstrous.”

My read of that summary is a tad different. Peter’s says utility theory is goofy. That’s the foundation of classical econ. I don’t see any commentary on monetary policy in his work.

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Then never mind.
It is not about Monetary Theory. I’ll have to get my Physics Degree (which I do not have) and disprove that myself.

Utility theory and MMT are different. MMT just explains the system we already use, but refuse to acknowledge.

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I’d like to see your reasoning behind this. I think it is erroneous.

Money supply may actually need to grow. To keep the amount of money each person uses to buy the basic basket of goods they consume constant over time, then the equilibrium point would be to print money at the sum of the rate of inflation plus the population growth rate. Even if we maintain an inflation of 1.5%, it would result in positive money printing indefinitely.

Err, you have cause and effect backwards. Long term, inflation trends toward (rate of money growth) - (rate of growth of value of a country’s output). Printing money CAUSES inflation, inflation does not necessitate printing money.


You’re correct, in a growing economy, we need to print money simply to keep prices level. If the real economy grows at 3%, we need to add 3% to the money supply.

When I said “to pay the debt”, I meant creating enough money to pay off the debt.

The MMT proponents say that the the money supply went from $1 trillion to $4 trillion between 2008 and 2015. And, it’s increased another $1 trillion in 2020. All that with no inflation. The opponents say that’s an unusual, short term aberration.

I’m not sure about this. I understand this is the classic Econ dogma.

But that dogma was based on sovereign currencies that were backed by either gold or silver. It makes sense there. But with pure fiat currencies, I’d need for you to show how that still applies.

Now if you have country that borrows in a currency other than their own sovereign one, then I think your classic case is most likely still valid. EU countries and any other country that effectively borrows in USD, are in this situation.

When a government can service its debt (interest + principle) by simply creating the currency to do so without any cooperation from anyone else, I don’t see how there is much risk there.

We need to be careful with our terms here. We do not have to pay off the debt, We do need to service the debt. It may seem like nit picking, but there is a difference.

And those opponents have been predicting inflation for at least 20 years. It has not happened. MMT has a clear explanation for that. What is the classic explanation? I’ve not heard one to date.

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I’m not sure where the complexity is. US prints money to pay off all the debt creates more supply of dollars relative to unchanged demand, thus devaluation --> inflation. All of this recent interest in pretending debt is irrelevant is because of historically weird economic times in the short run, but in the long run things are a lot simpler. We can certainly debate short term interventions but not by throwing out the long term view as irrelevant.

And whether you’re printing money to service debt versus paying off the debt is just a scale issue, it’s the same levers.

We do have inflation, it’s just not super high, but we’re up from the crazy low inflation that resulted in QE (although possibly down again with the COVID demand shock).

And missing inflation over the last 20 years? I see CPI inflation of almost 6% in 2007.

This is a pretty gross oversimplification of the situation. If I turn a treasury bond into $'s I’m not convinced that is a material change in what I would consider money. If you had a treasury bond in a retirement account and they turned it into $10,000 instead how does that change your behavior?

I’m not convinced that substituting $'s for treasuries truly represents a large change in the money supply. How different is owning a treasury bond from holding cash right now?

Clearly it’s not material, but that’s the issue with your analogy. You’re suggesting the Fed print a lot more than $10,000, and it would manifest as inflation in the same way any increase of supply results in lower prices, as the supply flows through a market.

I believe his point is, the money supply is unchanged when the Fed exchanges a credit of cash to the bond holder’s account and retires the TBill. The money was in an interest bearing vehicle and then was transformed into a non interest bearing vehicle. No change in the money supply at all.