The Japanese denial story – Part 1

Well, it’s 2022 already and we enter the 18th year of this blog. Regular readers will know that I have studied the Japanese economy in considerable detail over the course of my career and when it experienced one of the largest commercial asset price bubble busts in history in early 1992, the questions I was asking and the data I was looking out were important in framing the way I have done macroeconomics since. I consider Japan to be one of the nations that was early to embrace the madness of neoliberalism – credit binge, wild property speculation then crash – and the first nation to abandon it in favour of more responsible fiscal policy – which given the circumstances required on-going fiscal deficits exceeding 10 per cent of GDP at times. Its policy approach – including the relatively high deficits, the zero interest rate policy of the Bank of Japan, and then the massive bond-buying program by the same, became the target for various New Keynesian macroeconomists (including Krugman) to prophesise doom. Their textbook models predicted the worst – rising interest rates, accelerating inflation, rising bond yields and then government insolvency as bond markets bailed out and the currency plummetted. Nothing like that scenario emerged. Japan was playing out policies that ran counter to the mainstream consensus in the 1990s and beyond and I learned so much from understanding why things happened there as a consequence. This is Part 1 of a two-part discussion about why Japan demonstrates key MMT principles and how those who wish to deny that reality have to invent a parallel-universe version of MMT to make their case.

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The ECB is facing a crisis – rising inflation and risk of Member State insolvency – how to make a problem

The Eurozone continues to stumble on, held together by the vast bond-buying program of the ECB, which has saved several Member States from insolvency over the last several years. While all the talk at present has been about what to do about the punitive and unworkable fiscal rules in a post-pandemic (when will that be?) period, when the emergency waivers of the Excessive Deficit Mechanism procedures are withdrawn, the reality is that under the current architecture, the only thing that keeps the currency union intact is the ECB acting outside of the legal structures set down by the treaties. Yes, I know full well that the elites have massaged the public into believing that there is no breach of the no bailout clauses, but the reality is different. The ECB is (indirectly) funding Member State fiscal deficits through its massive asset purchasing programs, the two relevant ones being the PSPP and the PEPP. And ever since they introduced the Securities Market Program (SMP) in May 2010 they have been providing funding to Member States to allow them to run fiscal deficits while maintaining low bond yields. With the Pandemic Emergency Purchase Programme (PEPP) scheduled to end in March 2022, the fears are growing that Italy will be the first Member State to succumb to the bond markets – the yields on debt will rise because the investors appreciate the credit risk and will know they cannot offload as much debt onto the ECB in the secondary markets. The fact that these fears are becoming more widespread should tell you that the role of the ECB is exactly what I say it is rather than the ‘maintaining order in investment markets’ spin that the ECB runs as the smokescreen.

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Turkey – who is squeezing who?

It’s Wednesday and a shorter blog post, which includes the latest from Turkey and some music. The mainstream narrative against Modern Monetary Theory (MMT) has been ramped up significantly in recent weeks as a result of events in Turkey, where, up until yesterday, the currency had depreciated significantly. The screams for interest rate rises from bankers etc (of course! they profit or protect foreign debt exposure) have been deafening. But the most recent monetary policy decision was on December 16, 2021, when the CBRT reduced its policy rate (the one-week repo auction rate) from 15 per cent to 14 per cent. The ‘markets’ can’t really get a handle on the current government’s thinking because it is running against the mainstream in several ways, including cutting rates to reduce inflationary pressures (see Press release on Interest Rates – from the CBRT). Overnight a big swing happened after the government made a significant fiscal policy announcement. That will further confound the markets who were forced to scramble to close out short-selling positions as the lira appreciated by around 25 per cent in one day. The fiscal squeeze worked. You couldn’t make this stuff up.

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Turkey tells us nothing about MMT – but MMT tells us a lot about why Turkey is in trouble

I have noticed a lot of Internet traffic about Modern Monetary Theory (MMT) and the situation in Turkey at present. Apparently, as the narrative goes, MMT is finally being revealed as a fraud because Turkey’s economy is going backwards and its currency is depreciating rapidly. The logic, it seems, is that if a nation enters rough economic waters and the financial markets sell its currency (although remember someone has to be buying it simultaneously) then that proves MMT is false. An extraordinarily naive viewpoint if you think about it. This viewpoint has somehow missed the train on understanding what MMT actually is and seems to think that MMT economists have seen Turkey as a policy model. In this blog post, I consider some aspects of this naivety. It won’t silence the critiques, but it, hopefully will educate those who are interested in the topic and are learning about MMT.

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Sunak – (bad) comedian of the year

It’s Wednesday and I load up other things to do on this day and thus write less here. I also am in the process of moving offices at the University – and after some 18 years in different locations, I am now returning to the Social Sciences Building where I first had an office when I came to the University from Adelaide. Which feels sort of okay, given by opposition to economics being treated as a business discipline. But thanks to a deal I made with the University in 2007, my research centre left the ‘business faculty’ and went out on our own. Hence, my office doesn’t have to be with the other economists, which I am happy about. This morning, I read the most stupid thing I think one could ever read about economics. It came from a UK Guardian article (December 14, 2021) – Sunak warns over multibillion cost of booster programme – where the Chancellor basically disqualified himself from office. Once we get through the trauma of that sort of news, I promise there is some great music to finish with.

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Teaching disadvantaged adults about child development is an effective way to reduce inequality

Some recent research highlights the point I have made in the past that who your parents are matters for your future prospects. We all make choices as we emerge into the adult world, but the constraints that are dished up to us by our parents are in many cases more important in determining our future outcomes than the choices we make. The mainstream neoclassical explanation for income differentials focus on the choices – for education, training, and other career development pathways. From a policy perspective, I think it is more sensible to focus on the constraints as they are in many cases fairly easily altered by sensible government intervention. However, in the real world, not only are the constraints that individuals face conditioned by the circumstances that they are born into, but those circumstances also influence the choices the individuals make. Recent research has found that educational programs for parents in disadvantaged situations to show them what determines child development not only improves the lives of the adults involved but also delivers much better outcomes for their children. They are able to make better decisions which, in turn, improve the environment in which they are learning and building their skills. The policy implications are clear.

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Central banks are resisting the inflation panic hype from the financial markets – and we are better off as a result

Regular readers will know that I think the current inflationary phenomenon is transitory. They will also know that I see the continual claims by financial market economists that central banks have to increase interest rates now to avoid an accelerating inflationary episode as having little economic content and lots of self interest content. If rates go up, they win their bets and the more they can bully authorities to do their bidding the more certain their bets become profitable. I am glad that central banks around the world are resisting that game of bluff. In previous periods, they have not resisted and have handed the financial speculators (the top-end-of-town) massive and unjustified profits and forced millions of workers to endure joblessness. It is also interesting that the mainstream press is starting to work that out too. Some progress.

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The NAIRU should have been buried decades ago

In 1983, I started a PhD at the University of Manchester working within the Phillips curve framework. At the time, all the talk was Monetarist – eschewing the use of fiscal policy to reduce unemployment. Unemployment was high after the OPEC oil shocks and governments were abandoning their responsibilities to reduce it because they had drunk the Monetarist Kool-aide. The Monetarists invented a concept – the Non-Accelerating Inflation Rate of Unemployment (NAIRU) or the ‘natural rate of unemployment’, which became part of the dominant macroeconomic approach and influenced policy makers to pursue microeconomic reform (deregulation, privatisation, outsourcing etc) and obsessing about fiscal surpluses. My work was an attempt to show this shift in thinking – away from a commitment to full employment was based on a lie. The whole NAIRU story was a fraud. I was largely ignored along with other progressive economists who were also producing credible research that refuted the main propositions. Some 40 years later, the ECB has produced a research paper which now supports the position I took back then. Millions of jobless people later!

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New German finance minister thinks (27 per cent slump in GDP) Greece is Germany’s new role model for reform

It’s Wednesday so not much today. I offer some comments on the latest data release from Germany (not good) and the probability that the new German finance minister will be anything other than a dangerous dud. An announcement about the edX MMTed course (coming back). And then Blind Willie Johnson serving up Great Depression angst.

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The same erroneous logic that created the social housing shortage is apparently the solution

Australia has a dire housing crisis, particularly in the low-income or social housing end. Since the 1990s, successive federal governments, who fund the social housing, have abdicated from their responsibilities citing a lack of funds and the need to run fiscal surpluses in order to save money for the future. While it has been starving the social housing sector, it has been investing billions of dollars in its Future Fund, ostensibly to cover future liabilities. So instead of spending funds on hospitals, education, housing and other important infrastructure needs, the government has been spending on speculative financial assets in global markets, some of which have been scandalous (see below). The whole narrative has been based on the falsehood that the government is like a household and has to save to expand its future spending possibilities. That logic has killed off many valuable initiatives, including maintaining adequate social housing stocks such that now low income Australians are increasingly becoming poor or homeless due to the high cost of private-provided housing at market rents. Today, a new proposal was launched by a think tank advocated that the Australian government should borrow to build the Future Fund so it can deliver speculative returns to help fund the dramatic shortfall in social housing. That is, they are using the same logic (the government is financially constrained) to solve a problem the logic created. It would be hard to make this stuff up.

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