Posts about monetary policy

Currency-issuing governments never have to worry about bond markets

How many times have to heard a politician claim they had to cut government spending and move the fiscal balance to surplus because they had to engender the confidence of the bond markets. Apparently, this narrative alleges that if bond markets are not ‘confident’ (whatever that means) then they will stop begging treasury departments for more debt issues and the government, in question, will run out of money and then pensions will stop being paid and the public service will be sacked and public trains and buses will stop running and before we know it the skies will blacken and collapse on us. The narrative ignores the usual statistics that bid-to-cover ratios are typically high (hence my ‘begging’ terminology) which are supplemented by well documented cases where the bond dealers (including banks etc) do actually beg central banks to stop driving yields down in maturity segments where these characters have pitched their “business model” (read: where they make the most profits). The facts are exactly the opposite to the neo-liberal pitch. Currency-issuing governments never need to worry about how bond markets ‘feel’. Essentially, the bond markets are irrelevant to the ability of such a government to design and implement its fiscal plans. And, the central bank always can counteract any tendencies that the bond markets might seek to impose where governments do actually issue debt.

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Inflation rises in Euro Area – but don’t claim it is the ECB’s doing

Eurostat released the latest inflation data for the Eurozone last week (March 2, 2017) for February 2017 – Euro area annual inflation up to 2.0%. As the title reveals the Euro area inflation rate rose from 1.8 per cent in January 2017 to 2 per cent in February 2017. The mainstream narrative is already emerging – ‘see we told you that all that central bank bond purchasing would (eventually) be inflationary’ – type of stories. Bloomberg (March 5, 2017) waded in early with the headline – Draghi Seen Keeping Cool on Stimulus Drive Amid Inflation Surge. I expect a bevy of mainstream economists who haven’t worked out yet they have nothing sensible to add to the public debate will chime in like those wind-up toys that children play with and argue they ‘knew it all along’ – QE would be inflationary. Well I am sorry to say that the data tells us if a significant element of the cost structure rises so will inflation – simple as that. The slight uptick in inflation in the Euro area does not support the mainstream argument that building bank reserves will flood the economy with ‘money’, which then drives inflation.

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Australia’s household debt problem is not new – it is a neo-liberal product

One of the defining features of the neo-liberal era has been the buildup of private debt, particularly household debt. The banks and policy makers all assured us that this was fine because wealth was being built with the debt until, of course, it came tumbling down for many as a result of the GFC. Recent commentary on Australia’s record household debt problem and the increasing number of Australian households that are now on the brink of insolvency and cannot pay their bills seems to think this is a new outcome – the result of record low interest rates as thew central bank (RBA) tries to curb the descent into recession. The fact is that the problem emerged in the 1980s as neo-liberalism took hold of the policy process. We have to understand that period to fully appreciate the household debt problem now.

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The ECB should not become a fiscal agent

On November 29, 2016, Mario Draghi, the President of the ECB wrote to Mr Jonás Fernández, a Spanish European Parliament member in reply to a request for clarification from the Chairman of the EP’s Committee on Economic and Monetary Affairs (ECON). The Letter discussed whether it would be legal under the Lisbon Treaty for the ECB to engage in direct monetary transfers to citizens bypassing the Member States and whether such a policy would be beneficial for economic growth. Several commentators have seized on the response from the ECB as saying that such a policy innovation would be both legal and beneficial. My view is that, in forming this conclusion, they have not fully understood the difference between a monetary and a fiscal operation. While I think the policy would produce positive results, in the sense that it would stimulate growth and employment and reduce unemployment, I also believe it would be illegal under the Treaty. Further, I don’t think it is a progressive position to argue that a group of unelected and unaccountable technocrats in the central bank should be in charge of economic policy. That should be the responsibility of the democratically-elected members of the government who are fully accountable every electoral cycle. The ECB should not become a fiscal agent. Rather, if the Eurozone elites cannot implement (which they cannot) a full federal treasury function then it should disband the monetary union in an orderly way.

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Australian Labor Party fails the fiscal test – badly

I guess the venality of the new US Presidency isn’t creating enough news for the Australian press. On January 29, 2017, the Fairfax press wheeled out the veritable debt scaremongering in this article – Scott Morrison to lift credit limit as Australia’s debt hurtles towards $500 billion – reporting that the Australian government “will be forced to lift its own self-imposed credit limit in the coming months as debt hurtles towards half-a-trillion dollars”. Instead of writing about how stupid and unnecessary this ‘self-imposed limit’ is, the journalist wanted to talk about the disaster that awaits us as the debt of the currency issuing government “hurtles” like some asteroid to its death towards half-a-trillion dollars. As I said, must have been a day that imagination in the journalistic world was lacking. The worst part of the story is not the idiocy of its logic or the fact that it links to an inane Australian Debt Clock homepage, but, rather, the reported response from the Labor Party Shadow Treasurer. The Labor party is meant to represent the workers and claims to be the progressive force in Australian politics. That ladies and gentlemen is the sick joke of all time. This is a party that has abandoned its traditional remit (to defend the well-being of workers) and instead spouts neo-liberal gibberish without knowing it.

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Foreign sales of US government debt are largely irrelevant

Happy New Year to all readers. I will not write much today (to reflect to on-going holiday spirit!). But, there was an article in Bloomberg media (December 30, 2016) – Beware the Foreign Exodus From Treasuries – stirring up fear about the recent sales of foreign-held US government debt. I guess it was a slow news day or something because there is very little in the story that is relevant to assessing whether the US government can run an appropriate fiscal policy stance. The fact is that the foreign sales of US government debt are largely irrelevant for the US government’s capacity to maintain its net spending program. The sales are in US dollars and only the US government itself issues those dollars. To think that a foreign purchaser of a US Treasury debt liability are ‘providing dollars’ to the US government is to completely misunderstand the nature of the transaction. This blog considers the current data and explains how to think correctly about these matters. The question that financial commentators really should be asking is why should the US government extend that corporate welfare (risk-free bonds with income flow) to domestic bond-buyers and foreign governments/private investors. There is no financial reason (in terms of facilitating fiscal policy) for the bond issuance. It is just a form of welfare spending which helps the top-end-of-town.

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US central bank decision to raise interest rates doesn’t make much sense

On December 14, 2016, the US Federal Reserve Bank pushed up its policy target interest rate from 0.5 per cent to 0.75 per cent. In its – Press Release – it said that the “labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year”. It acknowledged that “business investment has remained soft”. But it believes that even though it has increased the rate by 25 basis points, there is still room for “some further strengthening in labor market conditions and a return to 2 percent inflation”. The logic is very confused in my view. First, the US labour market is weak (in inflation pressure terms) notwithstanding the reduced official unemployment rate. Real wages growth has been effectively zero and the broad measure of labour underutilisation (U6) remains at 9.3 per cent (as at November). Second, the emphasis on central bank policy shifts is based on a view that elements of total spending are sensitive to interest rate changes and by increasing rates, price pressures will attenuated. The only problem with that logic is that all the elements of spending in the US (private investment, household durable goods) are hardly setting the world on fire. Private investment, in particular, is in poor shape. So by the US Federal Reserve bank’s own logic (which I do not share) it should be expecting on-going further poor investment growth, which will further undermine potential productive capacity. Not a sound strategy at all.

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When Britain went fiat and the skies remained above

A former student sent me an E-mail recently and updated me on his progress and his current research project – the history of British banking in the 19th century. He also wanted to draw my “attention to a little known period in British Economic history that seems to reinforce the interrelationship between fiat currencies, public debt and expenditure and rates of economic growth and unemployment”. So square centre of my own research interests (among others). So I did some further digging and read back through the notes I have taken over the last 35 years as a researcher. I was aware of the Bank Restriction Act 1797 “was an Act of the Parliament of Great Britain … which removed the requirement for the Bank of England to convert banknotes into gold.” This essentially created a fiat currency system with the central bank as the currency issuer. More interesting things arise as you dig further. For a period of 24 years, Britain lived under this form of monetary system. And, need I add, during this period Britain usurped the Netherlands as the most developed economy in the world at that point in history and the industrial revolution boomed. The mainstream economists of today would have predicted catastrophic results from the 1797 Bank Act. But then we know that what they say has zero credibility anyway.

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Bank of Japan is in charge not the bond markets

I read a report on the American news network CNBC the other day (November 15, 2016) – The bond vigilantes are back, and Trump better pay attention – which included some so-called experts in a video claiming to know something about bond markets. The report asserted that “bond vigilantes” might return to force the new US President to “tone down his spending” (as they allegedly did when Bill Clinton was in office). One expert said “we’ve got fiscal policy again and … the prospect of higher interest rates and inflation could even herald the return of the bond vigilantes”. Idiot is a polite term for him. The journalist and the commentators invoked should take time out and learn about what is happening in Japan, which remains the best Modern Monetary Theory (MMT) ‘laboratory’ there is. The Bank of Japan in now putting into operation the decision it took in September 2016 to buy unlimited amounts of Japanese government bonds at a fixed-yield. Which means? In short, it will control the yields across all bond maturities from 2-year out to 40-year and will set them at whatever level they choose. Oh, won’t the bond markets prevent that happening? How? For the bond markets it is a case of “like it or lump it”. Once again Japan demonstrates that mainstream macroeconomic theory is devoid of understanding.

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Australia’s new central bank governor chooses to dissemble on fiscal issues

The new governor of the Reserve Bank of Australia (our central bank) gave a speech in Melbourne yesterday (November 15, 2016) – Buffers and Options to the annual dinner of the Committee for Economic Development of Australia (CEDA). CEDA is a seedy type of organisation that typically advances the neo-liberal agenda. Please read my blog – The CEDA Report – one of the worst ever – for more discussion on this point. But that is not the topic today. The new governor has already began his tenure in disappointing fashion. I discussed his first foray into public life in this role in the blog – First appearance by Australia’s new central bank governor disappointing. His latest public intervention suggests he is hardening this stance – perpetuating the myths that a currency-issuing government is dependent on bond markets for its spending capacity and that public borrowing puts a burden on future generations. While today’s blog is about Australia, the principles elucidated are universal.

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