If only the citizens knew what was going on!

There was an interesting forum in the The Economist Magazine on August 11, 2010 which considered the question – What actions should the Fed be taking?. The Economist assembled a group of academic economists (mainly) and the opinions expressed largely will make any person who understands how the monetary system operates and what the current problem is shudder in disbelief. What the discussion reinforces is that the mainstream economists really have failed to understand what the crisis was all about and do not comprehend the nature of the solution. Most of the contributions are just mindless repetition of what you might find in any mainstream macroeconomics textbook. It is very scary that these characters continue to be heard. If only the citizens knew what was going on!

The first contribution came from Viral Acharya is an academic at NYU and he was focused on reform of the Government sponsored enterprises (GSEs) (the largest being Fannie Mae and Freddie Mac).

In this context, he said:

WITH the excess supply of housing in the United States and the end of the credit boom, it is unlikely that housing prices will pick up in the near future. To continue to use GSEs as the “bad bank” in the meantime to prop up the housing market creates the difficult situation that there is no clear exit for the GSE nor for the GSE debt and securities on the Fed’s balance sheet. Ultimately, the overhang of these assets may raise a potential conflict with the Fed’s monetary policy: a rise in interest rates reduces the value of these securities and may even trigger credit risks that would have to be funded by the Treasury, risking the Fed’s independence. Hence, first and foremost, though it is not directly a part of the Fed’s monetary policy role, the Fed – and the Treasury – need to have a plan to reform the GSEs in an orderly manner. This can only be done with a public-private partnership that resurrects the private securitisation market, rather than the current close-to-fully-public support of mortgage finance.

I haven’t written much about the GSEs because I am not concerned with the impact on the US Federal Reserve Bank’s balance sheet. As was noted last week, the Fed looks to be comfortable with the $US2 trillion odd asset holding they now have and the concerns about credit risk are non-concerns in a fiat monetary system.

The issue of central bank independence is coming back again. There was an interesting article in June by Pimco’s Paul McCulley – Some Unpleasant Keynesian-Minsky Logic – where he said that the concept of central bank independence was honed in the higher inflation period of the early 1980s.

But he now claims there has been a “victory over inflation” and “the dominant secular risk has been deflation” over the last several years. In that context:

When deflation risk dominates inflation risk, particularly in the context of a liquidity trap with the Fed funds rate penned near zero, the fiscal authority dominates the monetary authority. Indeed, in such conditions, the monetary authority may be required to pursue quasi-fiscal policy actions – such as Credit Easing and Quantitative Easing – to augment conventional fiscal policy stimulative actions.

McCulley said he understands the argument that “(t)o some, this implies a diminution in the monetary authority’s independence in the political arena, threatening insidious inflation on some distant horizon”. But to express his preferred interpretation, he quotes Fed Chairman Ben Bernanke (who was talking in 2003 about the role of the Bank of Japan):

With protracted deflation, however, excessive money creation is unlikely to be the problem, and a more cooperative stance on the part of the central bank may be called for. Under the current circumstances, greater cooperation for a time between the Bank of Japan and the fiscal authorities is in no way inconsistent with the independence of the central bank, any more than cooperation between two independent nations in pursuit of a common objective is inconsistent with the principle of national sovereignty.

In Modern Monetary Theory (MMT) the concept of central bank independence is somewhat inapplicable. In this introductory blog – Deficit spending 101 – Part 1 – I noted that in seeking an understanding of the essential structural relations between the government and non-government sectors the there is no real significance in separating treasury and central bank operations conceptually.

This is because it is the operations of the consolidated government sector (central bank and treasury) that determine the extent of the net financial assets position (denominated in the unit of account) in the economy. For example, while the treasury operations may deliver surpluses (destruction of net financial assets) this could be countered by a deficit (of say equal magnitude) as a result of central bank operations.

This particular combination would leave a neutral net financial position. While the above is true, most central bank operations merely shift non-government financial assets between reserves and securities, so for all practical purposes the central bank is not involved in altering net financial assets. The exceptions include the central bank purchasing and selling foreign exchange and paying its own operating expenses.

While within-government transactions occur, they are of no importance to understanding the vertical relationship between the consolidated government sector (treasury and central bank) and the non-government sector. We will consider this claim more closely in a future blog.

I also explicitly covered the debate about central bank independence in this blog – Central bank independence – another faux agenda.

It was always argued that to be an effective inflation fighter, the central bank had to be political independent. But this was really the articulation of an agenda that eschewed active fiscal policy and sought to deregulate markets and use unemployment and a policy tool to suppress wage costs.

Under the ideology of central bank independence, monetary policy is not focused on advancing public purpose. Fighting inflation with unemployment is not advancing public purpose. The costs of inflation are much lower than the costs of unemployment. The mainstream fudge this by invoking their belief in the NAIRU which assumes these real sacrifices away in the “long-run”.

My reading of the vast empirical literature on this topic over the years also leads to the firm conclusion that there is no robust relationship between making the central bank independent and the performance of inflation.

Further, the shift in aggregate policy to monetary policy with passive (and contractionary) fiscal policy violates reasonable notions of democracy. When does the public get to elect the central bank board? And with interest rates playing the bogey person role in modern economies given the dependence in the private sector on debt, changes in monetary policy carry political messages for that the government has to sanitise.

The point is that this approach to policy-making forces fiscal policy to adopt a passive role. If it doesn’t then it will be seen to be working against the rigid application of the monetary policy rules. The consequences of that have been the persistent labour underutilisation that has plagued advanced nations for 35 years even during periods of economic growth.

Given the vast pools of underutilised labour resources that exist and will remain high for years to come as a result of this policy mix.

So from a MMT perspective, it would be preferable to merge the central bank with the treasury and release thousands of bright former central bankers via retraining into the workforce to use their brains doing something useful. It would also be an improvement if the public debt issuance machinery was also dismantled.

In this scenario, fiscal policy would become the dominant tool and short-term interest rates would be set at zero. Please read my blog – The natural rate of interest is zero! – for more discussion on this point. I would control inflation via a Job Guarantee.

The second Economist contribution came from Boston academic Laurence Kotlikoff who has extreme views which I considered in this blog – Several universities to avoid if you want to study economics.

Kotlikoff said “(i)f the Fed’s going to monetise debt, now’s the time to do it” but seemed to get very confused. He reasserted his claim that the “The US is bankrupt” because the IMF thinks the “The US fiscal gap is huge for plausible discount rates”. There is no sense in that statement and I explained why in the blog referred to in the last paragraph.

But the curious part of Kotlikoff’s contribution in the Economist debate was that he realises that the “fiscal gap” (the deficit) is not going to be closed any time soon by tax increases the US government will have to “print money”.

First, there is no necessity to eliminate the deficit especially when the US is running an external deficit and the private sector is trying to save overall. It would be lunacy to reduce the deficit even. In fact, the US government should expand it give the persistently high unemployment rates and idle capital.

Second, the preferred MMT operation would be for the government to maintain net spending at levels commensurate with high levels of economic activity – so striking a balance between nominal demand growth and the capacity of the real economy to absorb it – and avoid any debt-issuance in the process.

The connotation of “printing money” is an emotional misnomer. All government spending occurs in the same way – crediting bank accounts. The monetary operations that follow – such as issuing debt – have not bearing on the capacity of the sovereign government to spend in this way.

Please read this suite of blogs – Deficit spending 101 – Part 1Deficit spending 101 – Part 2Deficit spending 101 – Part 3 – if you need to brush up on why governments issue debt.

Ultimately, public debt is unnecessary and provides corporate welfare returns that skew equity outcomes in favour of the top-end-of-town. So it would be preferable to desist altogether and take Kotlikoff’s advice – net spend without issuing debt.

But it is strange that Kotlikoff thinks the US government is bankrupt when he acknowledges that it has the capacity to meet “its obligations”. So in other words the guy is a snake-oil salesman and the US government is not bankrupt and cannot become so given its currency monopoly.

The real agenda that Kotlikoff wants to run is the mainstream macroeconomic myth that such net spending would be inflationary. He says:

But the extra money leads prices to rise by more than would otherwise occur. This reduces the purchasing power of the money and of the government bonds people already hold. And this loss of purchasing power of existing money balances and the decline in the real value of government debt represents the seignorage tax.

This will only be a problem if the resulting nominal demand growth outstrips the real capacity of the economy to respond to it with increased real output. At present there is so much idle capacity that there is no inflation risk at all.

Further, Kotlikoff and his ilk have been screaming for a few years now that the increase in the US Federal Reserves balance sheet (expansion of the monetary base) was going to be inflationary. They have been spectacularly wrong and that is because they do not understand how the monetary system actually operates.

Their blighted macroeconomic textbook models bear no relation to reality.

Please read the following blogs – Building bank reserves will not expand credit and Building bank reserves is not inflationary – for further discussion.

He shows this ignorance by noting tha the US “Fed could print $9 trillion this morning and buy back all outstanding Treasury bills and bonds”. Yes it could – with a few electronic entries. But according to Kotlikoff:

But the prices of goods and services would skyrocket and the dollar would lose all of its value. Worse, everyone would see they’d been taken and that they should never have held dollars or anything denominated in dollars. Overnight people would make the yuan, the Canadian dollar, or some other more trustworthy money the reserve currency.

This is unlikely to be the outcome. The central bank action would just expand bank reserves. There is not necessity (or likelihood) that aggregate demand would increase much.

He then twists uncomfortably because he knows that the Fed’s increased balance sheet is already reflecting a decision to pursue this sort of scenario anyway and that the prices of goods and services have not skyrocketed. He says:

So, to get back to the question of what monetary policy the Fed should be running right now, my answer is that if the Fed is ultimately going to need to print money to pay the government’s bills, this is the time to do it or, at least more of it. The danger, though, is that when the economy returns to normal, there will be so much money sloshing around that prices will rise dramatically.

The Fed is very worried about this outcome having printed $1.152 trillion since August 2007 and jacked up the monetary base by a factor of 2.4. Indeed, the Fed is so worried about this extra money getting into the economy’s bloodstream that it’s been bribing banks to horde this money as excess reserves. The bribe is coming in the form of paying interest on the excess reserves. This bribe has also been used to pass money under the table to the banks so they could “earn” money in a completely safe manner and, thereby, remain solvent.

In worrying about inflation and in keeping the banks afloat via payment of interest on excess reserves, the Fed has undermined its other objective, namely getting the banks to make more loans to the private sector. I think it’s time to focus on that objective. Hence, I’d also recommend that the Fed stop paying interest on deposits and take the risk on inflation. Jobs, at this point, are more important than prices.

How you make sense of any of this is another question. In fact, there is no sense to be made of these statement.

The Reserve Bank of Australia has been paying a return on bank reserves for years. There is no sense that this is a bribe. It actually makes it easier for it to hit its policy target when overnight rates are positive. It means that there will be less competition in the overnight interbank markets in pursuit of returns on excess reserves and makes it easier for the central bank to conduct its liquidity management operations.

Further, should aggregate demand ultimately become a problem, there is a fairly rapid fiscal remedy – increase taxes and/or cut some stimulus support.

Finally, the banks do not lend their reserves! That is a total mispresentation of what is happening. The commercial banks can lend whenever they like and are never reserve constrained. The extra bank reserves currently being held do not increase the capacity of the banks to make loans.

The real problem is that the state of the US economy is still so bad that no-one wants to take the risk and seek credit to expand production (that might not sell at a profit).

Please read my blog – Money multiplier – missing feared dead – for a recent discussion on this point.

The next debate contribution came from Columbia University’s Guillermo Calvo whose really summed up the problem.

He said “(t)he Fed must address Main Street’s credit crunch” by seeking ways to lend to small firms. He realises that the non-standard measures the Federal Reserve has taken to date have not stimulated demand. They have had some effect on long-term interest rates but that impact is not significant when the state of confidence among borrowers is so low.

In the context of his “main concern … that an incipient price deflation might gain momentum”, he said:

THERE are good reasons to be worried. Fiscal stimulus is about to be phased out while exports are weak, the real wage index is about the same as in 2007, and unemployment is high. Not surprisingly, the possibility of a double-dip recession is gaining alarming consensus. The Fed has been left alone in this battle …
Is this enough? I don’t think so … Good intentions are not enough, and buying long-term Treasury bonds will not be good enough either. The Treasury is not hurting for lack of credit.

His closing conclusion is a stunning example of how these mainstream economists do not get it and want to hang on to their flawed textbook views. He realises that the main policy option – fiscal policy – is being politically neutered (and worse) and that:

… (s)tandard open market operations, including the purchase of long-term Treasury bonds, are unlikely to have much traction, unless the Treasury comes back to the fray …

But then he support Kotlikoff’s view by saying he “would not favour” any fiscal expansion. So there you have it. The solution is unpalatable to the mainstream because it offends their ideology and is dangerous in terms of their textbook models. The empirical world violates those models every day but they fail to or refuse to recognise that.

Their reliance on the remaining aggregate option – monetary policy – has been demonstrated categorically by this crisis to be limited and relatively ineffective in dealing with the problem. He admits that but still wants more monetary innovations.

The Economist then gave space to another mainstreamer – Rutgers’ Michael Bordo who said “(t)he Fed should credibly commit to a price level target”. He claims that the:

The fear over deflation and a return to recession is overblown. The recovery has hit a speed bump but it is unlikely to be derailed. The Fed needs to maintain its credibility for low inflation by credibly committing to an inflation target of about 1% (of core inflation) and/or even better a price level target.

That is, tighten monetary policy when there is 10 per cent unemployment. While I am not a great believer in the effectiveness of monetary policy I would not be tightening it just in case.

The next contribution came from our polite friend Mark Thoma who continues to believe that aggregate demand is responsive to interest rates. I would have thought the crisis has shown that very low interest rates do not provide much stimulus. I also would have thought that Japan has given us an excellent laboratory for some decades about the relative effectiveness of fiscal and monetary policy.

Thoma suggests that the US Federal Reserve should be aiming to find “a way to lower the real interest rate” and the best way is to inflate expectations of future inflation by announcing “a higher inflation target”. There is no coherent empirical research that would support the hypothesis that aggregate demand would expand if this was done.

Thoma also wants more “quantitative easing” but should take caution from Japan and the UK in this regard. While it might reduce long-term interest rates and theoretically make investment more attractive the pessimism at present is so entrenched that there will not be a borrowing surge at lower rates.

But in the end, Thoma agrees that the monetary options are limited and:

… without additional fiscal stimulus to add to the demand created by lower rates, something we are very unlikely to get, I fear that the stimulus from these measures, in addition to being too late, will also be far too little.

I agree 100 per cent with that. The only way borrowing will resume is if firms come to the view that they can sell the increased production. That shift in sentiment will not come unless workers start to spend more and the best way to accomplish a shift in that direction is to reduce unemployment.

Widespread job creation strategies are necessary in this regard and that is the domain of fiscal policy.

Of the remaining contributors, the offering by Richard Koo is worth noting. Koo said that “(t)Fed should ask for fiscal policy support” and:

The Fed should explain that … [in a balance sheet recession] … monetary policy is largely ineffective because those with negative equity are not interested in increasing borrowings at any interest rate. The Fed’s continued failure to explain the exact nature of the disease only increases the public’s expectations for monetary policy which could lead to a big disappointment later with an equally serious loss of credibility for the central bank.

Moreover, during balance sheet recessions the effectiveness of monetary policy actually depends on the government’s fiscal policy. This is because when the private sector is deleveraging, money supply shrinks as bank deposits are withdrawn to pay down debt. The only way to keep money supply from shrinking is for the public sector to borrow money.

I don’t agree with the language that Koo uses but it is clear that all those who think that monetary policy can somehow increase private borrowing have seriously misunderstood the current issue and, more generally, not understood how the monetary system operates.

Please read my blogs – Balance sheet recessions and democracy and The government is the last borrower left standing – for more detailed analysis of Koo’s perspectives.

Koo also noted the

Admitting the limitations of monetary policy, however, is difficult for those who are trained to think that fiscal policy is bad while monetary policy is almighty, the kind of thinking that dominated the academic world for the last three decades. As a result, there have been numerous proposals for unconventional monetary policy, such as quantitative easing, that are nothing more than acts of desperation.

Indeed! Investments are always hard to scrap. So when a person has invested a career in mainstream macroeconomics and has been sheltered from the world by tenure they become reluctant to open their eyes to new ideas. Indeed, they never have an interest in determining that the empirical world has categorically shown their theories to be useless.

So they continue to advocate the same line as always. In this case, their ideological hatred for fiscal intervention is so strong that they are prepared to allow persistently high unemployment rates and the massive wastage that goes with them while they try to come up with new monetary interventions.


If only the citizens knew what was going on!

The majority of commentators still think that monetary policy is the only counter-stabilisation tool that should be considered. The debate continues to be hobbled by wrongful notions of inflation and unsustaianable fiscal outcomes leading to sovereign default.

That is enough for today!

This Post Has 20 Comments

  1. You have some interesting arguments Billy but can you please run a condensed version of your postings. Between family and domestic duties, time is short and often have to ship you log posts.

  2. Koo hits the nail on the head when he talks about the bias amongst academic economists in favor of monetary policy. Economists are obsessed with the Fed. They closely scrutinize every action and every word uttered by the Fed, much like the way a theologian looks for hidden meanings by parsing every sentence of the Bible. Its really an almost religious pursuit.

    Nowadays when you see economists in the media you almost never hear the word “demand” uttered. Fiscal policy is irrelevant, made meaningless by the mantra of Ricardian Equivalence or some newly-giftwrapped version of the loanable funds theory. How can it work? There is no ‘free lunch’ in economics!

    But these same economists will, in the next breath, seriously entertain the notion that if the Fed were to just announce a higher “inflation target” then all will be well with the world. Amazing.

  3. This is because it is the operations of the consolidated government sector (central bank and treasury) that determine the extent of the net financial assets position (denominated in the unit of account) in the economy. For example, while the treasury operations may deliver surpluses (destruction of net financial assets) this could be countered by a deficit (of say equal magnitude) as a result of central bank operations.

    This particular combination would leave a neutral net financial position. While the above is true, most central bank operations merely shift non-government financial assets between reserves and securities, so for all practical purposes the central bank is not involved in altering net financial assets. The exceptions include the central bank purchasing and selling foreign exchange and paying its own operating expenses.

    Not sure of this. Increases in HPM cannot be taken to be creating net financial assets.

    If the government runs a surplus, it runs a surplus. The central bank operation cannot convert a surplus into a non-surplus.

    When a central bank purchases foreign currency, its just exchanging one asset for another. If a domestic bank is the seller of the foreign currency, the central banks’ assets and liabilities increase and the bank has an increase in settlement balances in compensation for the decrease of foreign currency. If a non-bank is selling foreign currency, the central bank’s assets and liabilities increase and some bank’s assets and liabilities increase.

    This is for Anglo-Saxon institutional setups. For overdraft financial systems, the central bank’s purchase of foreign currency is compensated by a decrease in claims on banks. No change in settlement balances. The bank is less indebted to the central bank than before and has less foreign assets.

  4. Bill claims that a treasury surplus can be thwarted by a central bank deficit. Ramanan queries this: “The central bank operation cannot convert a surplus into a non-surplus.”

    Ramanan is technically correct, I think, but Bill’s basic point (on a broad interpretation) is correct in that a deflationary treasury policy can the countered by a central bank adopting a reflationary policy, e.g. dropping interest rates.

    This situation, i.e. where two branches of government can “fight against each other” is a farce. Although Bill casts doubt on the merits of central banks, if one DID have an independent central bank under an MMT regime, the split of responsibilities as between central bank and treasury would be, or could be more logical.

    That is, if the government – central bank machine issued no debt, and just net spent where necessary, the central bank could be responsible for holding inflation on target by stipulating how much net spending was to take place, and elected politicians would determine everything else, e.g. total of government income from taxation, the sources of taxation and the make up of government spending.

    And the mere fact that MMT leads to a simple logical set up, suggests that MMT is a valid idea. If idea X helped Einstein reach his simple equation E=MC2 , that suggests that idea X is valid.

  5. Ramanan,

    “If the government runs a surplus, it runs a surplus. The central bank operation cannot convert a surplus into a non-surplus.”

    Bill did not split it between the government and the central bank, but between treasury and the central bank.

    The CB remits its profits to the Treasury. If the Fed got itself into a bind and starting generating negative interest margins from its quantitative easing (unlikely in my view), it would run its own deficit and reduce the budget balance otherwise running through the treasury.

    The FX question is a little more difficult in my view and one that I haven’t thought through.

    At the highest level, the net financial asset position could be defined as equivalent to the net financial asset position expressed in terms of government liabilities.

    The CB’s purchase of FX increases the non government sector NFA position in terms of government liabilities, while leaving it the same in terms of all types (government and non government) liabilities.

    This is consistent with the purchase of FX being treated like deficit spending (I’ve noticed Mosler referring to it this way). If so, a CB’s purchase of private sector assets (as in the Fed’s earlier credit easing) should be treated the same way.

    But I’m not sure if this is the right way to do it. It moves the NFA concept past the idea of its association with net expenditure/income generation, which I think is a pure idea, and starts to include asset risk transformation.


  6. JKH,

    If that is the case for the central bank, thats fine by me. However see my comment in the previous thread.

    If NFA is denoted in the currency of the government whose central bank is doing the fx transactions, then NFA in that currency changes not NFA because the latter includes assets and liabilities in other currencies as well.

    Yes, if you start thinking of risk, then its more complicated.

  7. Bill, this is off-topic, but I was wondering what your views are regarding an ecological tax shift? This would entail taxing pollution, resource extraction, a land-value tax, etc. I understand that under MMT taxes only control aggregate demand, so couldn’t such a shift produce tangible benefits for the economy and the planet’s health as a whole?

  8. Kotlikoff:

    “This bribe has also been used to pass money under the table to the banks so they could “earn” money in a completely safe manner and, thereby, remain solvent.”

    Good grief. Do these people ever do a reality check the actual numbers?

    $ 2.5 billion in pre-tax interest per year – to rescue the US banking system? Right.

    More of Kotlikoff on video yesterday, re “US bankruptcy”:


  9. Bill,
    Off-Topic: Given your interest in people’s rights to a job, you may already know that Jimmy Reid, the Scottish trade union leader from the 70’s had his funeral today. I’d never heard of him till now, yet it seems very sad, and Billy Connolly has spoken at his funeral, very moving:

    Channel 4 – Tributes paid at Jimmy Reid’s funeral

    Kind Regards

  10. LVT,

    The main reason I am poisoning my brain with economics is precisely because I want to know the answer to your question (which is also my question) before the light goes off.

    If we throttle consumption, the house of the cards called modern capitalism collapses. If we don’t throttle we will repeat the experiment from the Easter Island on the global scale.

    I would also add examining the ideas of individual carbon trading or other types of resource consumption rationing.The idea of redefining property rights to shift our relationship with the environment from the space of “private goods” and “common goods” (rivalrous) to “public goods” (non-rivalrous) sounds reasonable to me, too.


    I may need to spend a few more years learning enough to be able to contribute to this discussion in any meaningful way.

    I disagree that we as humans evolved to be greedy and competitive, concentrate our lives around hoarding and then feel guilty because of the debt (and obviously because we are doing immoral things to the others). This was a part of the cultural evolution which took place mainly in the ancient Rome, later in some Western European countries and finally in the USA.

    This is a cultural cul-de-sac that’s why I am not entirely convinced whether lubricating the current American system with the MMT is a right thing to do. The America may not be worth salvaging at all. Letting the natural process of the euthanasia (assisted suicide) of the American global empire in the name of “fiscal responsibility” to unfold may not be a bad idea – before the global version of the “tragedy of the commons” unfolds. I seriously doubt whether the US can reform as there are certain principles around which that society is built (what includes the assumption that absolute property rights and liberty are the same) which block that process. This is in my opinion the main hidden reason why Jobs Guarantee will be rejected. But if we preach MMT to them hard enough they will discover that they can “print” even more money to wage more wars.

    The fundamental cultural difference between the “mainstream” Americans and the “rest” is visible even in some comments posted on this blog. Please do not read my comments as anti-American in the nationalist sense because there is a lot of people living in the US who may share these concerns. But the “mainstream” clearly don’t…

    Human behaviour in general is flexible and there are examples of other cultures which are less invasive and then self-destructive in the long run. Even the “Socialism with the Chinese characteristics” (which I am not a great fan of because of the human rights issues) may offer some hope as the State/CCP leadership has started realising that “There Is No Alternative” (TINA) to massive investment in the R&D leading to limiting the consumption of energy/non-renewable resources/pollution/climate change.

  11. Cant say how happy I am to find discussion of the issues relating to central bank and Treasury operations and relations, both within and without MMT.

    Kotlikoff is obviously a complicated man.
    On one hand, a traditional Neo-liberal leaning almost to a fault (Bill would say for sure) on the matter of the defaultability of a monetary sovereign.
    I totally agree with Bill, and not because Kotlikoff’s finding of default is evidenced only by the opinion or concern of the IMF, of all people(?). If you can appreciate the significance of monetary sovereignty, then there are always legal avenues available that would prevent any form of national insolvency.
    On the other hand, Kotlikoff is quite radical in his call for narrow banking using a full-reserve system and debt-free funding of deficits, a position shared by Bill, Warren and others, but for seeming unrelated reasons.

    For those of us who see monetary reform as the essential public policy change needed, it makes a difference whether the operation of the money system is done for public purpose or private gain. Either the nation’s money system is all about capital markets and private gain, or it is about the government function of providing the nation’s circulating medium of exchange.

    To me, it’s the latter.
    Our central bank operation makes it out to be about the former.

    In a world where the government doesn’t know it is sovereign, and believes it must borrow from the private bankers in order to provide for the national economy, a sovereign default appears likely.
    And it is the threat of that sovereign default that licenses the Austerinans and the Petersons to destroy the real national economies of all nations.

    That is why monetary reform is the highest priority for achieving a conservative adjustment to the money system, separating out the banking from the money-creation functions, after which we have a financially-sound, totally private banking system, and a central bank operating as part of the government.
    Sectors, that is.

    Our failure to recognize the gilded hand of the Master Marionettists at the Fed remains the biggest obstacle for bringing the needed socio-economic debate to the table.
    And I think the story of the reforms needed is right here:

    Just saying.
    Thanks, Bill.
    And, all.

  12. Oh dear this is bad:


    “Sticks work better than carrots

    The results suggest that benefit sanctions are much more effective in stimulating the transition from welfare to work than reemployment bonuses. A possible explanation is that benefit sanctions include an immediate financial consequence for the welfare recipient, while reemployment bonuses are a promise on a payment in the future. Welfare recipients may suffer from some degree of present bias and may heavily discount uncertain delayed payments such as cash bonuses. Furthermore, it should be noted that the take-up rate of the cash bonuses is only 38%.”

    It never ceases to amaze me how mainstream economists can be so reactionary.

  13. Timothy,
    Reading the article you referenced, it seems to me that they are looking in the wrong place when it comes to motivation for employment. It is the employer who is prejudiced against the long term (even short term) unemployed, and is therefore the party that really needs the carrot to provide employment. Many companies in the UK will always try to poach people who are already working somewhere else, before considering the unemployed. Presumably, this is some kind of supply-side nonesense.

    Kind Regards

  14. Charlie- agree with you entirely.

    It is supply-side nonsense par-excellence.

  15. Ralph@Thursday, August 19, 2010 at 21:59

    “That is, if the government – central bank machine issued no debt, and just net spent where necessary, the central bank could be responsible for holding inflation on target by stipulating how much net spending was to take place, and elected politicians would determine everything else, e.g. total of government income from taxation, the sources of taxation and the make up of government spending.”

    Could you spell this out in more detail? I think that the negative reaction to MMT and similar ideas is the visceral fear of inflation, particulaly hyperinflation. I’ve been looking for a rigorous argument (I’ve seen unsupported assurances that of course this wouldn’t be allowed to happen) on how inflation can be contained under MMT. I’m convinced from my own examination of the issues that if govt injects money at a rate equal to the combined rates of saving, investment and net imports, that inflation can be avoided. But if there is an actual rate greater than this (say, political reasons), what does the CB do to contain inflation?

  16. DJC: I don’t think that the negative reaction to MMT is entirely “visceral”. I support MMT, but at the same time I think some MMT advocates (like advocates of many new ideas) overestimate the merits of the new idea. Some advocates of MMT seem to think that under MMT, demand can be bumped up to unprecedented levels without inflationary consequences. I don’t agree.

    Now for the question in your last sentence about “injections” and “what does the CB do to contain inflation”. I agree that injections should approximately equal the opposite of injections, i.e. leakages. But that in itself won’t guarantee the optimum inflation-unemployment stance. For example inflation can become excessive because of irrational exuberance. In this situation, the CB (under the regime I advocated above) just tells government that the latter must reduce net spending.

    The latter is not a GOOD way of dealing with irrational exuberance because it doesn’t get at the root cause, which is the ballooning of private sector credit and money that takes place in a boom. Nevertheless, simply altering government net spending is powerful tool for influencing demand, and thus inflation and unemployment.

  17. To DJC:

    In addition to the alterations to government spending (including the Job Guarantee proposal) another element for inflation control in the MMT world is the use of regulation. In a post last year Bill noted that increases in house prices, a significant area of concern, can be controlled through restrictions on the availability of credit for mortgages.

    An illustration in a different area: in Canada a few years ago we had a regional outbreak of inflation in the province of Alberta when the provincial government failed to properly regulate the tar sands industry and allowed vast private investment to get far ahead of almost all availabe resources required to develop them. The Canada-wide level of inflation was 2% and in Alberta it rose to 5%. Eventually even the oil industry asked the government to restrict investment.

    There is always a danger of excessive inflation if the government or private sector spends more than the capacity of the economy to absorb it. Since there are considerable regional differences in the economy inflation control can be a problem. This is where an MMT pillar for the regulation of demand, the Job Guarantee, comes in. It varies regionally according to demand for labour, an interesting way to fine tune demand right down to the local level.

    I suppose if you believe that governments are always incompetent, opportunistic, irresponsable, etc, and you had a great fear of somewhat higher inflation and were callous toward the plight of your fellow citizens, then you would opt for the status quo which controls inflation through chronic high unemployment and underemployment albeit at the price of damaging the lives of countless millions of people.

  18. Ralph: “For example inflation can become excessive because of irrational exuberance. In this situation, the CB (under the regime I advocated above) just tells government that the latter must reduce net spending.”

    That is not correct to my understanding. MMT does not tell to reduce spending it tells to use fiscal policy which have more tools at its disposal than just spend/not spend.

  19. Sergei: It think MMT is very much about “spend/not spend” in that MMT is concerned primarily, if not exclusively, about AGGREGATES: i.e. total government spending and total government income. That is, MMT is not concerned about whether government spends more on health and less on education or vice versa.

    The only part of fiscal policy that significantly influences aggregate demand (allegedly) is the freedom that finance ministers or treasuries have to borrow and spend. However, I think I am right in saying that Abba Lerner (more or less the founding father of MMT) did not think that this borrowing made sense. That was why I ruled it out in my first post above. I agree with Lerner: I actually think that Keynsian “borrow and spend” is a load of bo**ocks! See here:


    And it looks like Yeva Nersisyan agrees. See fifth last para here:


  20. Ralph, yes, MMT is 50% about “spend/not spend” and another 50% about “tax/not tax”. So when we get to irrational exuberance then the problem at hand switches from “spend/not spend” to “tax/not tax”

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