When intra-governmental relations became absurd – the US-Fed Accord – Part 3

I am writing this while waiting for a train at Victoria Station (London), which will take me to Brighton for tomorrow’s presentation at the British Labour Party Conference. The last several days I was in Kansas City for the inaugural International Modern Monetary Theory Conference, which attracted more than 200 participants and was going well when I left it on Saturday. A great step forward. I believe there will be video for all sessions available soon just in case you were unable to watch the live stream. Today’s blog completes my little history of the US Treasury Federal Reserve Accord, which really marked a turning point (for the worse) in the way macroeconomic policy was conducted in the US. In Part 1, I explained how from the inception (1913), the newly created Federal Reserve Bank, America’s central bank, was required by the US Treasury Department to purchase Treasury bonds in such volumes that would ensure the yields on long-term bonds were stable and low. There was growing unease with this arrangement among the conservative central bankers and, in 1935, the arrangement was altered somewhat to require the bank to only purchase debt in the secondary markets. But the change had little effective impact. The yields stayed low as was the intent. Further, all the prognistications that the conservatives raised about inflation and other maladies also did not emerge (which anyone who knew anything would have expected anyway). In Part 2, I traced the increased tensions between the central bank FOMC and the Treasury, which in part was exacerbated by the slight spike in inflation that accompanied the spending associated with the prosecution of the Korean War in the early 1950s. The tension manifested into open disagreement about the FOMC’s desire to raise interest rates and end the pegged yield arrangement with the Treasury. In Part 3, we discuss the culmination of that tension and disagreement and examine some of the less known and underlying forces that were fermenting the central bank desire for rebellion.

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When intra-governmental relations turned sour – the US-Fed Accord – Part 2

In Part 1 of this mini-series – When relations within government were sensible – the US-Fed Accord – Part 1 – I examined the pre-1951 agreement between the US Treasury department and the US Federal Reserve Bank, which saw the bank effectively fund the US Treasury. The nature of that relationship, which began when the central bank was formed in 1913, changed in 1935 when the legislators voluntarily chose to change the capacity of the currency issuer to buy unlimited amounts of US Treasury debt directly to one of only being able to purchase the debt in the secondary markets once issued. But the effect was the same. The central bank could control the yields at any segment of the bond maturity curve at its will. The shift in 1935 was the result of conservative forces that were intent on derailing the government’s capacity to use the consolidated central bank/treasury to efficiently advance well-being. They wanted political constraints placed on the Treasury, such that it would have to issue debt to the non-government sector before it could spend, which they knew was an arrangement (similar to formal debt ceilings) that could be used to pressure the government towards austerity. By the time the Korean War ensued, these conservative forces were winning the political debate and big changes were to come, which would limit the fiscal capacity of the US government to this very day. The result has been an inefficient fiscal process prone to capture by conservatives and certainly not one that a progressive would consider to be sensible. I analyse that shift post-1942 in this blog, which is Part 2 in the series. In Part 3, we pull the story together and reveal what was really going on.

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When relations within government were sensible – the US-Fed Accord – Part 1

I have all that much time today to write this up and it is going to be one of those multi-part blogs given the depth of the historical literature I am digging into. So this is Part 1. The topic centres on an agreement between the US Federal Reserve System (the central bank federation in the US) and the US Treasury to peg the interest rate on government bonds in 1942. What the agreement demonstrated is that a central bank can always control yields on government bonds, which includes keeping them at zero (or even negative in the current case of Japan). What it demonstrates is that private bonds markets, no matter how much they might huff and puff about their own importance or at least the conservatives who are ‘fan boys’ of the bond markets), the government always rules because of its currency monopoly

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The role of literary fiction in perpetuating neo-liberal economic myths – Part 2

In The role of literary fiction in perpetuating neo-liberal economic myths – Part 1, I noted introduced the idea that fictional literature plays a significant role in framing false economic concepts and, thus, can promotes neo-liberal biases among the readership, even when the plot of the narrative is ostensibly about something other than economics. In other words, what parades as fiction becomes a powerful tool for spreading ideological propaganda, often in a very subliminal or subtle way. In Part 2, I demonstrate that further and provide correct Modern Monetary Theory (MMT) interpretations of popularised economic statements that the characters in the book in focus (The Mandibles) weave into their conversation as if they are accepted facts. The lesson is clear. To further advance Modern Monetary Theory (MMT) ideas, novelists who are sympathetic to the cause should construct their narratives consistent with the MMT principles, where economic matters are touched upon in their work. This will help to counter the misconceptions that arise in literary fiction when authors engage with flawed neo-liberal arguments about the monetary system. It might also help educate book reviewers who often, knowingly or unknowingly, reinforce the myths in the main text.

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The role of literary fiction in perpetuating neo-liberal economic myths – Part 1

A few weeks ago I wrote a blog – Reflections on a visit to New Zealand – which began by summarising some research I am working on which will be presented (with Dr Louisa Connors) at the upcoming MMT conference in Kansas City. This specific paper will be examining the role that fictional literature plays in framing false economic concepts and, thus, promoting neo-liberal biases among the readership, even when the plot of the narrative is ostensibly about something other than economics. We show that fiction is a powerful tool for spreading ideological propaganda, often in a very subliminal or subtle way. The lesson we draw from this work is that to further advance Modern Monetary Theory (MMT) ideas, authors, who introduce economic concepts into their writing, should construct their narratives consistent with the MMT principles. This will help to counter the misconceptions that arise in literary fiction when authors engage with flawed neo-liberal arguments about the monetary system. This blog is in two parts and today is Part 1. Part 2 will come another day (soon).

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US labour market weakens as unemployment spikes up

On September 1, 2017, the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – August 2017 – which showed that total non-farm employment from the payroll survey rose by 156,000 in August, a smaller increase than in July, more like the weak result for May. So the July figure now seems to have been a blip in the data. The Labour Force Survey data showed that employment actually fell by 74 thousand in August and with the rise in the labour force (77 thousand), official unemployment rose by 151 thousand. The official unemployment rate also rose to 4.44 per cent. There are now 7.1 million unemployed persons in the US. There is still a large jobs deficit remaining and other indicators suggest the labour market is still below where it was prior to the crisis. Further, the bias towards low-pay and below-average pay jobs continues.

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Central banks still funding government deficits and the sky remains firmly above

There was an article in the Financial Times last week (August 16, 2017) – Central banks hold a fifth of their governments’ debt – which seemed to think there was a “challenge” facing policymakers in “unwinding assets after decade of stimulus”. The article shows how central banks around the world have been buying huge quantities of government (and private) bonds and holding them on their balance sheets. Apparently, these asset holdings are likely to cause the banks headaches. I don’t see it that way. The central banks, in question, could write the debt off any time they chose with no significant consequence. Why they don’t is the question rather than whether they will become insolvent if the values crash (they won’t) or whether the yields will skyrocket if they sell them back into the non-government sector (they won’t). Last week (August 15, 2017), the US Department of Treasury and the Federal Reserve Board put out their updated data on Foreign Holders of US Treasury Securities. Other relevant data was also published which helps us trace the US Federal Reserve holdings of US government debt. Overall, the US government holds about 40 per cent of its own total outstanding debt – split between the intergovernmental agencies (27.6 per cent) and the US Federal Reserve Bank (12.4 per cent). In some quarters, the US central bank has been known to purchase nearly all the change in total debt. That folks, is what we might call Overt Monetary Financing and the sky hasn’t fallen in yet as a consequence.

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US labour market – improves again in July

Shonk is an Australian/NZ slang word to describe someone engaged in shonky behaviour, which the Oxford Dictionary describes as being behaviour that is “Dishonest, unreliable, or illegal, especially in a devious way”. So a shonk means a “dishonest person; swindler or con artist” and while intent is implied it doesn’t have to be conscious action (note the inclusion of the descriptor “unreliable”). It could just mean stupidity or ignorance that leads to shonky performance. I will come back to that topic soon. On August 4, 2017, the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – July 2017 – which showed that total non-farm employment from the payroll survey rose by a relatively healthy 209,000 in July. The weak result for May now seems to have been a blip in the data. The Labour Force Survey data showed that employment rose by 345 thousand in July but was still not large enough an increase to offset the rise in the labour force (349 thousand), and as a consequence, official unemployment rose by 4 thousand. The official unemployment rate was stable though at 4.4 per cent. There are still 6.98 million unemployed persons in the US. There is still a large jobs deficit remaining and other indicators suggest the labour market is still below where it was prior to the crisis. Further, the bias towards low-pay and below-average pay jobs continues.

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A government can always afford high-quality health care provision

The Commonwealth Fund, a New York-based research foundation that analyses health care systems, recently released an interested international comparison of the performance of such systems across a number of criteria (July 2017) – Mirror, Mirror 2017: International Comparison Reflects Flaws and Opportunities for Better U.S. Health Care. Health care is one of several policy areas where the debate descends into fiasco because the typical application of mainstream economics obscures a widespread understanding of how the monetary system operates and the opportunities that system provides a currency-issuing government. Once an understanding of Modern Monetary Theory (MMT) is achieved the choices available in health care policy become more obvious and better decision-making is likely. The Commonwealth Fund report provides useful information in this regard, although the MMT understanding has to come separately.

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The conservative opposition to full employment legislation in the US

In 1946, with the Second World War at an end, the world governments turned to the question of how to maintain the full employment that the prosecution of the War had brought in the peace. It was clear that governments could choose whatever unemployment level they wanted through the manipulation of fiscal and industry policies and so the only question was the political will to maintain the full employment state. In the US, the political debate led to the Employment Act 1946, which demonstrated that the parameters of the conflict between conservative and the more liberal forces over what constituted full employment and what responsibility the currency-issuing government had for maintaining high levels of employment. We can see through successive attempts in the US to legislate for full employment how the economic profession has influenced the political process and how we have reached the point today where governments pay lip service to fulfulling their responsibilities as the fiscal agency to maintain sufficient jobs for those who desire to work.

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