I am still catching up after being away in the UK last week. I will…
Oh to be truly brilliant
I am sick of reading or hearing how brilliant such and such economist is and how they should be regarded as oracles because of this “brilliance”. In all these cases, the reality is usually that these characters have left a trail of destruction as a result of applying their brilliant minds. The terminology is always invoked by financial commentators and the like to elicit some authority in the ideas of the person. Apparently, if someone is deemed brilliant we should take heed of their words and judgements. How could we ever question them? In this neo-liberal era, many such “brilliant” minds have been placed in positions of authority and their influence has shaped the lives of millions of people. The financial and then economic crisis has shown categorically that their mainstream macroeconomic insights are not knowledge at all but religious beliefs that bear no relation to real world monetary systems. But still these characters strut the policy stages – shameless – and, in doing so, continue to destroy the prospects for many. It would be good it they were truly brilliant and could see the destructive consequences of their religious zealotry. Oh to be truly brilliant.
There was this article – Inside the crisis – published in the New Yorker (October 12, 2009) which told us that Larry Summers is “one of the most brilliant economists of his generation”. Apparently:
… there are forty brilliant insights scattered around whole bunches of literatures … especially finance, labor, and macroeconomics.
By what criteria would we judge that?
That particular article documented the reasons why the US stimulus was too small despite modelling and advice that it should have been probably twice as large and even then it would have only partially filled the identified output gap that had emerged as private spending collapsed.
The decisions were taken at a meeting on December 16, 2008 and the final memo to the President from Summers outlined why the stimulus should not target the identified output gap. The memo said the stimulus should rather be:
… an insurance package against catastrophic failure.
So what you learn there is that despite the claims by the deficit terrorists that the fiscal stimulus did not work given the appalling unemployment that is evident the real reason that the US economy is still languishing close to recession is that – by design – the US government deliberately failed to introduce a stimulus of sufficient size to address the problem that they had identified.
In other words, Summers advised the President to allow unemployment to sky-rocket but to do just enough to prevent a depression (catastrophic failure). Fiscal policy didn’t fail in the US. It just wasn’t given a chance to work when it should have been. Had the US government introduced a $US1.2 trillion stimulus and relied on multipliers to fill the identified $US2 trillion output gap things would have been very different and the job losses would have been less.
Further, the hysteretic (path dependent) effects that arise when a recession is drawn out would have been stifled. The skill losses, the capital scrapping, etc would have been far less than have actually occurred as a result of the US government’s deliberate strategy to under-stimulate. These effects reduce the potential growth path and make it harder to get back onto the previous trend growth. They ensure that the costs of the recession persist for years after the recovery process is under way.
The costs are not only in the extended losses of income. The accompanying costs manifest in the criminal justice system (rising crime), the health system (rising mental and physical illness), the family court systems (rising marriage and family breakdown) etc. The sum of these costs dwarf all other economic costs. And we should not forget that human lives are destroyed by prolonged recessions – dignity is lost, self-esteem disappears and the children who grow up in jobless households inherit the disadvantage that the system (failure to provide enough jobs) forces on their parents.
In other words, the costs of a recession endure across generations. The longer the recession the greater the costs.
Why would a “brilliant” mind in the face of the worst economic shock in 80 years and knowing that fiscal policy effectiveness would be in trial (given the fact that the neo-liberal dominated economics profession had largely come to the view that only monetary policy was effective) deliberately design a policy response to that ensured the economy would remain in a deeper and longer recession than otherwise?
Why would a “brilliant” mind who knew that the output gap would only be closed by additional spending and clearly knowing that there would be major political fallout regarding the effectiveness of fiscal policy should the recession deepen deliberately advocate a policy response that was going to ensure a prolonged recession?
What perversion of brilliance would suggest that deliberately ensuring that unemployment would sky-rocket and whole communities would be severely damaged was a bright thing to do?
The New Yorker said that Summers:
… believed that filling the output gap through deficit spending was important, but that a package that was too large could potentially shift fears from the current crisis to the long-term budget deficit, which would have an unwelcome effect on the bond market. In the end, Summers made the case for the eight-hundred-and-ninety-billion-dollar option.
The empirical reality has not accorded with his fears. Bond yields are low and bond markets cannot get enough government debt. Further, the Federal Reserve has shown that it can control rates on any segment of the yield curve.
Summers also believes in the ageing-population myth which I will touch on later and the existence of Ricardian households and firms. On this latter point, please read my blogs – Its simple – more public spending is required and Even the most simple facts contradict the neo-liberal arguments and Pushing the fantasy barrow – for more discussion.
The New Yorker documents a series of not-so brilliant gaffes in Summers career prior to working for Obama. They are well documented and include his famous memo while a senior economist with the World Bank that advocated the advanced world shipping their pollution to poor countries because:
The economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable.
They document is opposition to regulation of derivatives markets, his role in the repealing of the Glass-Steagall act, and his failure to understand what was happening in global financial markets at a time when it was obvious that a crisis was looming.
Very brilliant.
Please read my blog – Being shamed and disgraced is not enough – for more discussion on these oversights.
In a more recent article in the US Chronicle of Higher Education (October 3, 2010) – Larry Summers and the Subversion of Economics we read again that:
Summers is unquestionably brilliant, as all who have dealt with him, including myself, quickly realize. And yet rarely has one individual embodied so much of what is wrong with economics, with academe, and indeed with the American economy.
I guess that is my problem. How can someone so ignorant of how the monetary system works and who has advocated policy positions that have clearly led to very bad outcomes be labelled brilliant?
Maybe he can play chess well – that might be the answer.
The Chronicle article also documents his failures and lack of foresight. The article particularly reminds us of the 2005 meetings for central bankers at Jackson Hole, Wyoming when the then IMF chief economist Raghuram Rajan presented a paper which warned of a rising “probability of a catastrophic meltdown” as a result of the derivatives markets being unregulated. In a sense, his warnings were too tame and too late when compared to the stronger statements being made by proponents of Modern Monetary Theory (MMT) a decade or so earlier.
You can read Rajan’s original presentation HERE. I don’t agree with some of the points but the arguments about the failure to understand risk are sound. There is some background to this HERE.
The Chronicle says that:
Summers mocked and dismissed those warnings … [and] … When Rajan finished speaking, Summers rose up from the audience and attacked him, calling him a “Luddite,” dismissing his concerns, and warning that increased regulation would reduce the productivity of the financial sector.
You can read the whole transcript HERE.
Summers said:
I speak as a repentant, brief Tobin tax advocate, and someone who has learned a great deal about the subject … from Alan Greenspan, and someone who finds the basic, slightly lead-eyed premise of this paper to be largely misguided … the tendency toward restriction that runs through the tone of the presentation seems to me to be quite problematic. It seems to me to support a wide variety of misguided policy impulses in many countries. I would say as a final example of what has come out of the discussion for the 1987 crisis … argues for the benefits of more open and free financial markets, rather than for the concerns they bring.
That is so-called brilliance – two years later the world’s financial system all but collapsed and only significant government intervention saved it.
Enter US Federal Reserve Chairman – stage very far right
Another one of the economics glitterati – the brilliant ones is the US Federal Reserve Chairman Ben Bernanke. He is said to have a deep understanding of recessions and profound insights into monetary systems. This assessment is another case where the public are severely mislead.
Please read my blogs – Bernanke should quit or be sacked and Oh no … Bernanke is loose and those greenbacks are everywhere – for my earlier assessments of the Federal Reserve Chairman.
He was at it again on October 4, 2010 when he addressed the Annual Meeting of the Rhode Island Public Expenditure Council on Fiscal Sustainability and Fiscal Rules. This speech has been widely commented on in the media in the last few days – usually with journalists choosing to propagate the myths that the brilliant chairman perpetuates.
As an aside, if a treasury spokesperson (unelected official) or even a Treasurer (or the relevant minister) starts making comments about interest rate settings or desirable movements in monetary policy, the mainstream economists and their financial press lackeys start screaming that this is an unacceptable attack on the independence of the (unelected) central bank.
However, when the unelected central bank chairman makes stark remarks about the conduct of fiscal policy which support the neo-liberal agenda and which he knows will influence the policy debate and diminish the prospects for millions of people as a consequence, the mainstream macroeconomists and their lackeys in the press extol the intervention as a timely warning to profligate fiscal authorities.
Even if the comments were correct how does that fit with the concept that the central bank should be strictly independent and stay out of the political fray? It just reinforces what we already know – they are hypocrites.
In fact, there is no real central bank independence. It is one of the mainstream agendas designed to justify the mainstream neo-liberal attack on government macroeconomic policy activism. I have written about the myth of central bank independence in detail in this blog – Central bank independence – another faux agenda.
The neo-liberals invented the concept in an attempt to erode the democratic input into macroeconomic policy making. They claimed that without independence the central bank would be a subject of the political authorities and this would reduce its capacity to fight inflation.
Central bank independence (CBI) refers to the freedom of monetary policy-makers to set policy without direct political or governmental influence. The idea took hold in the mid-1970s as the neo-liberal onslaught began to dominate policy-makers. This dominance was consolidated by the early 1980s. It was time when the OPEC oil price rises had not worked their way out of cost structures around the world and inflation was still an issue.
The central bank independence push was based on the Monetarist claims that it was the politicisation of the central banks that prolonged the inflation (by “accommodating” it). The arguments claimed that central bankers would prioritise attention on real output growth and unemployment rather than inflation and in doing so cause inflation.
The Rational Expectations (RATEX) literature which evolved at that time then reinforced this view by arguing that people (you and me) anticipate everything the central bank is going to do and render it neutral in real terms but lethal in nominal terms. In other words, they cannot increase real output with monetary stimulus but always cause inflation. Barro and Gordon (1983) ‘A Positive Theory of Monetary Policy in a Natural Rate Model’, Journal of Political Economy, 91, 589-610 – was an influential paper in this stream of literature. It is highly flawed but that is another story.
Please read my blog – The myth of rational expectations – for more discussion on this point.
But underlying the notion of CBI was a re-prioritisation of policy targets – towards inflation control and away from broader goals like full employment and real output growth. Indeed, whereas previously unemployment had been a central policy target, it became a policy tool in the fight against inflation under this new approach to monetary policy.
Whether monetary policy is effective or not is another question. But the logic the mainstream believe in as an article of religious faith is that by controlling prices they maximise output over the long-run. In other words they are obsessed with the NAIRU concept. Please read my blog – The dreaded NAIRU is still about! – for more discussion on this point.
This is the reason governments should directly control the central bank to avoid issuing debt. The point is that it is the act of net spending in a fiat monetary system that drives aggregate demand and exposes fiscal policy to the risk of inflation. The monetary operations (the central bank liquidity management) do not increase or reduce this risk.
So if the government just leaves the net spending impact on the cash system as reserves (earning nothing) that doesn’t increase the risk of inflation resulting from the spending in the first place, relative to if they drain those reserves by offering an interest-bearing public bond.
From a conceptual perspective it is important to understand that a budget deficit records a flow of net spending. It is not a stock. So when we see a figure 3 per cent of GDP, that just says that the flow of net public spending in a year (or whatever) was 3 per cent of the flow of all spending.
With the current voluntary obsession with issuing public debt – the flow adds to the stock of public debt at the end of each period. If you didn’t issue debt the stock arising from the flow would manifest as increased bank reserves. Would the treasury care about that? Why would they?
Thus, I would collapse the central bank and treasury functions formally (in an organisational sense) and see it as a pro-democratic development. In practice, the central bank is part of the government sector because its transactions with the non-government sector are vertical. For an explanation of the difference between vertical and horizontal transactions please read the Deficits suite – Deficit spending 101 – Part 1 – Deficit spending 101 – Part 2 – Deficit spending 101 – Part 3.
For the government sector to work effectively the central bank and the treasury have to coordinate their monetary interventions, the former being passive to the latter, given that the treasury reflects the elected intentions of government. For me, having an unelected and largely unaccountable body able to change policy settings that damage employment is unacceptable in any sophisticated democracy. This trend towards so-called “independent” central banks has been a feature of the neo-liberal erosion of our democratic rights.
On the claim that “monetising” the public debt which is inflationary – I note that this is based on the discredited but still dominant Quantity Theory of Money which says that an increasing money supply translates directly into inflation. The theory is deeply flawed and has no empirical standing. Please read my blogs – Please read the following blogs – Building bank reserves will not expand credit and Building bank reserves is not inflationary – for further discussion. – for more discussion on this point.
From a MMT perspective, the concept of CBI is anathema to the goal of aggregate policy (monetary and fiscal) to advance public purpose. By obsessing about inflation control, central banking has lost sight of what the purpose of policy is about.
Please read my blogs – The consolidated government – treasury and central bank – for more discussion on this point.
Anyway, back to the “brilliant chairman’s” latest violation of central bank independence.
Bernanke said:
The recent deep recession and the subsequent slow recovery have created severe budgetary pressures not only for many households and businesses, but for governments as well. Indeed, in the United States, governments at all levels are grappling not only with the near-term effects of economic weakness, but also with the longer-run pressures that will be generated by the need to provide health care and retirement security to an aging population. There is no way around it–meeting these challenges will require policymakers and the public to make some very difficult decisions and to accept some sacrifices. But history makes clear that countries that continually spend beyond their means suffer slower growth in incomes and living standards and are prone to greater economic and financial instability. Conversely, good fiscal management is a cornerstone of sustainable growth and prosperity.
Neo-liberal mythology at its best.
First, the household-government budget conflation myth that drives all mainstream macroeconomic analysis of government policy and always leads it to draw erroneous conclusions. As I have said many times, there is no applicable analogy between the budget of a household and the budget of a sovereign government.
Household spending is always financial constrained as they are users of the currency of issue. Non-government agents in general have to source funds before they can spend – either through earnings, asset sales, prior savings or borrowing.
A sovereign government is never revenue constrained because it is the monopoly issuer of the currency. It neither has to tax or borrow to spend and logically has to spend prior to being able to collect tax revenue or borrow funds.
Second, the levels of government conflation myth that also demonstrates that the mainstream macroeconomic analysis of government policy is inapplicable. A state or local government does not issue the currency it uses and is thus unlike a national sovereign government with respect to its fiscal opportunities and choices. While a state/local government does have access to a tax base its budgetary constraints are akin to those faced by the household in that it has to find funding sources prior to being able to spend.
Third, the ageing population intergenerational budget time bomb myth is exhibited which alleges that the government, which can create net financial assets denominated in the currency of issue (aka money) will run out of money because more people will be demanding hip replacements or pensions in the future than is the case at present. The simple response to that myth is that the national government (US or any sovereign nation) will always be able to “pay for” its pension obligations or provide first-class health care to all as long as there is a political will to do it and there are real resources available to back the spending.
Fourth, the budget surpluses create national savings myth which alleges that governments have to reduce their role in the economy by cutting spending even though there is very high and persistent unemployment and huge spending gaps still present. We are told repeatedly that “very difficult decisions” and “sacrifices” have to be made to allow the government to create budget surpluses so that it will have more resources to spend in the future.
In fact, budget surpluses provide no extra spending capacity in the future. A sovereign government has unlimited spending capacity in its own currency. The constraints are never financial unless they are self imposed.
Fifth, the spend beyond your means myth which equates budget deficits with excessive spending. But in fact the concept of “means” for a national government is totally inapplicable. It has all the “financial means” that it could ever desire – infinity minus 1 cent. A sovereign government can never spend beyond its “means” in the sense that Bernanke is using this. They can spend too much in relation to the real capacity of the economy to absorb that spending via increased output.
With 10 per cent unemployment in the US, the US government faces very little opportunity cost (that is, in real terms) in engaging this labour for productive public sector work. The means are ample.
History only shows that when governments push nominal demand ahead of the growth in the real productive capacity of the economy they push beyond an inflation barrier. Governments have run budget deficits continuously for decades without encountering the types of problems Bernanke claims are inevitable.
So neo-liberal mythology at its best.
Bernanke says in relation to the US:
The budgetary position of the federal government has deteriorated substantially during the past two fiscal years, with the budget deficit averaging 9-1/2 percent of national income during that time.
The terminology “deterioration/improvement” has no meaning in the case of a sovereign government’s budget outcome. A rising budget deficit could be a sign that the real economy is collapsing (via the collapse of revenue as activity drops) or the exact opposite a public-spending supported growth phase. The focus should never be on the “budget outcome” but rather the real activity levels in the economy.
Bernanke at least realises that “premature fiscal tightening could put the recovery at risk” but then invokes the “medium- and long-term” myth:
If current policy settings are maintained, and under reasonable assumptions about economic growth, the federal budget will be on an unsustainable path in coming years, with the ratio of federal debt held by the public to national income rising at an increasing pace. Moreover, as the national debt grows, so will the associated interest payments, which in turn will lead to further increases in projected deficits. Expectations of large and increasing deficits in the future could inhibit current household and business spending–for example, by reducing confidence in the longer-term prospects for the economy or by increasing uncertainty about future tax burdens and government spending–and thus restrain the recovery. Concerns about the government’s long-run fiscal position may also constrain the flexibility of fiscal policy to respond to current economic conditions. Accordingly, steps taken today to improve the country’s longer-term fiscal position would not only help secure longer-term economic and financial stability, they could also improve the near-term economic outlook.
First, lets think about this a bit. The budget deficit rose for two reasons: (a) the sharp movements in the automatic stabilisers as private economic activity collapsed and tax revenue fell; (b) the less than adequate discretionary fiscal stimulus added to the bottom line.
The automatic stabiliser or cyclical effect will reverse once the economy grows again. The fact that the projections suggest that when growth does get back onto trend there will still be a deficit is not a source of concern. It just says that if structural budget balance is correctly computed then if there is a deficit remaining (at so-called full capacity) then it means that the non-government sector is saving overall and this saving (and high level of activity) is being supported by the public spending. That is a good thing!
If the structural deficit measure (correctly computed) rises over time that just means that non-government sector is desiring to save more overall. There is no problem there as long as activity levels are maintained by compensating public net spending.
The fact is that most estimates of structural deficits deliberately bias the budget estimates towards being more expansionary than they really are. Please read my blogs – Structural deficits – the great con job! and Structural deficits and automatic stabilisers – for more discussion on this point.
Second, growing public debt interest payments just tell us that the non-government sector is enjoying increased incomes and returns on their saving. That is a good thing! It doesn’t reduce the capacity of the national government to spend elsewhere. It might be that the combination of increased interest payments and other expenditure is deemed excessive in relation to the impact on nominal demand. There might be equity concerns as to who is getting the benefits of public spending (including the interest payments).
Then the government has a political choice – it could, for example, tax the interest payments away should that be considered desirable or lower interest rates.
Third, any projected long-term budget positions have no constraining impact on what the government can do now or later. The capacity of the government to spend in any period is not conditioned by what they net spend last period. The only constraints are the availability of real resources and the political machinations that are required to engender the spending.
Bernanke then spent some time outlining what he claims are “especially daunting fiscal challenges” which he claims will arise from two “important driving forces” – “the aging of the U.S. population” and “rapidly rising health-care costs”.
I have dealt with the ageing population myth in considerable detail in other blogs so I will only summarise the argument here. Please read my blogs – Democracy, accountability and more intergenerational nonsense and Another intergenerational report – another waste of time – for more discussion on this point.
If population ageing or rising health costs are a problem at all then they are real resource problems – they are never going to be a financial problem for a national government.
The entire logic underpinning the population ageing and health cost debates is flawed. The idea that budget surpluses in some way are equivalent to accumulation funds that a private citizen might enjoy and will help government deal with increased public expenditure demands that may accompany the ageing population lies at the heart of the intergenerational debate misconception. While it is moot that an ageing population will place disproportionate pressures on government expenditure in the future, it is clear that the concept of pressure is inapplicable because it assumes a financial constraint.
A sovereign government in a fiat monetary system is not financially constrained.
There will never be a squeeze on “taxpayers’ funds” because the taxpayers do not fund “anything”. The concept of the taxpayer funding government spending is misleading. Taxes are paid by debiting accounts of the member commercial banks accounts whereas spending occurs by crediting the same. The notion that “debited funds” have some further use is not applicable.
Further, the so-called government budget constraint is not a “bridge” that spans the generations in some restrictive manner. Each generation is free to select the tax burden it endures. Taxing and spending transfers real resources from the private to the public domain. Each generation is free to select how much they want to transfer via political decisions mediated through political processes.
When MMT argues that there is no financial constraint on federal government spending they are not, as if often erroneously claimed, saying that government should therefore not be concerned with the size of its deficit. We are not advocating unlimited deficits. Rather, the size of the deficit (surplus) will be market determined by the desired net saving of the non-government sector at desirable levels of real activity and employment growth.
To achieve and sustain full employment the government has the responsibility to ensure that its taxation/spending are at the right level. Accordingly, if the goals of the economy are full employment with price level stability then the task is to make sure that government spending is exactly at the level that is neither inflationary or deflationary.
This insight puts the idea of sustainability of government finances into a different light. The emphasis on forward planning that has been at the heart of the ageing population debate is sound. We do need to meet the real challenges that will be posed by these demographic shifts.
However, all of these remedies which focus on “fiscal consolidation” miss the point overall. It is not a financial crisis that beckons but a real one. Are we really saying that there will not be enough real resources available to provide aged-care at an increasing level? That is never the statement made. The worry is always that public outlays will rise because more real resources will be required “in the public sector” than previously.
As long as these real resources are available there will be no problem. In this context, the type of policy strategy that is being driven by these myths will probably undermine the future productivity and provision of real goods and services in the future.
It is clear that the goal should be to maintain efficient and effective medical care systems. Clearly the real health care system matters by which I mean the resources that are employed to deliver the health care services and the research that is done by universities and elsewhere to improve our future health prospects. So real facilities and real know how define the essence of an effective health care system.
Further, productivity growth comes from research and development and in Australia the private sector has an abysmal track record in this area. Typically they are parasites on the public research system which is concentrated in the universities and public research centres.
For all practical purposes there is no real investment that can be made today that will remain useful 50 years from now apart from education. Unfortunately, tackling the problems of the distant future in terms of current “monetary” considerations which have led to the conclusion that fiscal austerity is needed today to prepare us for the future will actually undermine our future.
The irony is that the pursuit of budget austerity leads governments to target public education almost universally as one of the first expenditures that are reduced.
Most importantly, maximising employment and output in each period is a necessary condition for long-term growth. The emphasis in mainstream integenerational debate that we have to lift labour force participation by older workers is sound but contrary to current government policies which reduces job opportunities for older male workers by refusing to deal with the rising unemployment.
Anything that has a positive impact on the dependency ratio is desirable and the best thing for that is ensuring that there is a job available for all those who desire to work.
Further encouraging increased casualisation and allowing underemployment to rise is not a sensible strategy for the future. The incentive to invest in one’s human capital is reduced if people expect to have part-time work opportunities increasingly made available to them.
But all these issues are really about political choices rather than government finances. The ability of government to provide necessary goods and services to the non-government sector, in particular, those goods that the private sector may under-provide is independent of government finance.
Any attempt to link the two via fiscal policy “discipline:, will not increase per capita GDP growth in the longer term. The reality is that fiscal drag that accompanies such “discipline” reduces growth in aggregate demand and private disposable incomes, which can be measured by the foregone output that results.
Bernanke then advocated for the use of more strict fiscal rules and rehearsed all the standard myths that accompany that debate and supporting literature. I have dealt with those myths in this blog – Fiscal rules going mad ….
Overall, a major neo-liberal intervention by the boss of the Federal Reserve. My assessment: not a very brilliant exposition of the way in which the monetary system operates but a very influential intervention nonetheless. Which just tells you that the level of understanding that the deficit terrorists have is pretty low (or non-existent).
Conclusion
Today I am giving a lecture on monetary systems at Maastricht University. The class has been exposed only to mainstream thinking and as such are totally without an understanding of how the system works. They probably think Summers and Bernanke are brilliant too.
Anyway, that is where I am heading now.
Tomorrow, the Australian Bureau of Statistics releases the latest labour force data and I am sure to be commenting on that.
That is enough for today!
You forgot Greenspan Bill. After leaving a trail of destruction, the guy is regularly paid guest speaker and is still often quoted with some authority.
I see how the quantity theory of money does not apply much to consumer prices if there is slack capacity in the system (as is the case). I find it much harder to get my head around the idea that the quantity theory of money doesn’t apply to asset price inflation. Japan may be an exception where people keep ever larger cash savings without being tempted to buy assets. On a global basis though it would be an accounting impossibility for asset prices to have risen by as much as they have over the past 40 years without currency expansion. Am I in a muddle about that?
Stone: you are correct. It is widely accepted that the money supply increase resulting from QE has resulted in an asset price boost. But I woulnt call this “inflation”. The latter consists of CONTINUOUS price rises. I would expect a bout of QE to be followed by a once and for all asset price rises.
Ralph Musgrave, that is what I struggle with. Deficit spending is as Bill points out a dead cert prediction on a global basis. So a globally diversified portfolio of assets can be confidently predicted to increase in price in the long run. People (those with lots of money) act accordingly. That ends up being a predictable continuous price rise aka inflation for the globally diversified portfolio of assets (which is how rich people store money). Am I missing something?
For what my 2 cents is worth.
Monetary stimulus like QE pushes savings away from the secure returns of Government bonds. Forcing savings to look for returns elsewhere. As bond holders are generally risk averse the savings look for safe returns, e.g. AAA corporate bonds. Maybe they just stay in bank accounts. That’s why QE is not having a big inflationary effect. A lot of QE money goes abroad and the domestic currency drops, you must get some imported goods price increases. I suppose this will taper off. Surely, some QE goes into more risky assets like stocks and property. Not much it seems. Clearly, QE doesn’t incent banks to lend more.
I believe the Japanese avoid property because house prices are still considered high, even after the bubble burst. The rental returns are low.
With a fiscal stimulus (e.g. JG) the money goes to pay workers and buy goods. If it gets spent on goods where inventory is low or capacity is constrained it can put upward pressure on prices. Businesses may take the opportunity to raise prices.
If the money is spent in other areas where inventory is available and/or there is spare capacity. There is no inflationary effect as businesses are still competing for market share and revenue. Obviously you have to aggregate the effects across the whole economy to find the net inflationary impact.
Eventually some of the Fiscal stimulus get’s stuck in saving accounts. It will start looking for returns. Then you may have some asset inflation. I would expect the asset inflation effect to be lesser than QE .
Andrew Wilkins, I can see that if the money went to a JG then their would be a delay before the money “leaked to savings” but unless every deficit has a transformative effect by definition a certain size of deficit entails a certain size of “leakage to savings” and so the savings would end up increased by the same amount as had the money been injected straight into savings via QE. Once in savings it eventually gets used to push up asset prices. If the local citizens are adverse to risking buying assets then the banks will just ensure that the savings get employed elsewhere in the world.
The only way I can imagine this not happening would be if not a penny leaked to savings and instead each deficit led purely to a further increase in levels of consumption. I can only imagine that happening if there was no one both comfortably off and able to tap into the money circulating from the deficit spending or else everyone however wealthy they were was desperate to spend every extra penny they got employing each other as feng shui consultants or whatever.
In real life I get the impression that “leakage to savings” seems pretty immediate in the UK. It would be great to know on average how long it takes between someone buying a loaf of bread and say the first 50% of that money being in a hedge fund or investment bank -for ever more destined to pass to and fro pushing up asset prices. I suppose the extra people now employed by the ever enlarging FIRE sector are the closest thing we have to absorbing the deficits as extra (pointless) activity rather than purely as (damaging) asset price inflation.
Stone: re your post at 23:47 you seem to argue that because advocates of MMT like Bill say that there will normally be a deficit, that therefor inflation follows and that MMT is responsible for this inflation. I suggest the cause effect is the other way round. I’ll explain.
It is generally accepted that inflation of about 2% is optimum (rather than 4%, minus 6% or any other figure). That means the monetary base and national debt will decline in value in real terms at about 2% a year unless they are constantly “topped up” with new money (i.e. topped up via a deficit). In addition, if the base and debt are to grow with the growth of the economy in REAL terms, then that requires even more deficit and topping up.
So if unemployment and everything else was absolutely constant from year to year, you’d need a constant and quite significant deficit. Unfortunately economies are unstable. When recessions arise, the deficit will need expanding. And from time to time there will a sufficiently large outburst of “irrational exuberance” (or other cause of excess demand) that government will need to run a surplus. But normally, for reasons I gave above, a deficit will the order of the day.
Ralph Musgrave, I have to stress I was purely talking about asset price inflation and not consumer price inflation. On your more general point, I thought that if hypothetically a totally fixed monetary base was enacted (eg if there were exactly £100B each £ with a serial number or whatever) then long term there could never be any inflation (there would be short term deflations and inflations). I thought that for much of human history there were sustained periods with no long term inflation. There is a plot of inflation in the USA from 1666 until 2004 on http://en.wikipedia.org/wiki/Inflation. The inflations and deflations oscilate until after WWII. Only since then is there long term continuous inflation. I seem to have got pretty much a totally different impression from you about all of this- have I totally failed to get my head around MMT?
Dear Bill,
I am curious how the students reacted on your lecture. Did the majority grasp it?
rvm took the words out of my mouth. I too am curious as to the reception you received from the students.
Stone,
I was thinking about your query. How long does it take for fiscal spending to end up in a savings account or an investment fund. From my observations on human behaviour, very little money gets saved. Someone pointed to an article in Singapore where 80% of direct stimulus spending was spent immediately. That would be the 80% least wealthy. The wealthy didn’t even notice the stimulus.
Savings are made mainly at the top end of town where people have too much money to spend. Say for argument 1% of every transaction sticks in some wealthy persons savings account. From there it’s into bonds or hedge funds …… whatever. I suppose it’s mathematically possible to graph how the stimulus accumulates in wealthy bank accounts. Amusingly, I’ve just realised the optimum way to control asset inflation is by increasing progressive taxes on the wealthy and taxing speculative gains.
As I see it, iron fisted control of financial intermediaries is essential to the well being of the economy. Free wheeling speculation does not lead to an efficient economic system. I advocate provision of a “safe place” to deposit surplus savings (e.g. National bank) with rigid regulation on speculation. I am laissez faire on genuine investments e.g. Corporate bonds and business loans. I would be very happy to see hundreds of banks competing to INVEST surplus savings in PRODUCTIVE enteprises.
Excuse me for my musings. I’ve just realised the last 20 years, we really have been playing a giant game of Monopoly.
Government spending is the bank paying our salary when we pass Go.
For ages, I was happily sitting on Whitechapel thinking I was rich.
Recently we all simultaneously landed on Park Lane. We were backrupted and our cards got turned over.
All the money has ended up with the players sitting on Mayfair and Park Lane.
Time to clear the board and start a new game.
Well, if Quigley’s thesis is correct, the bankers are realizing their aims. In that sense, they are “brilliant”. Can’t criminals also be brilliant?
How does arguing about accounting and financing help to solve our problems? We’re running out of planet to consume and pollute, and we’re running out of time. How much ignorance and poverty should be tolerated, leading to unsustainable population growth, famine, epidemics, suffering, and violence? How many species should go extinct each year? How many hectares of old-growth forest should be destroyed? How many aquifers and rivers should dry up? How much of the oceans, waterways, and lakes should be contaminated with heavy metals and petrochemicals? How many landfills should grow to the size of mountains? How many ideas for energy systems, urban agriculture/aquaculture and hydroponics, and cradle-to-cradle manufacturing should be ignored while oil and gas cartels dominate our energy supply, agribusiness dominates and patents our food supply, and short-term profits drive industry? When do we stop talking and start confronting the owners and managers of this derelict planet? The bureaucrats and technocrats all need to be thrown in prison for negligence and abuse. They talk of ‘failed states’. This is a failed planet. Tick tock, tick tock; time’s a wasting.
Dear anon (at 2010/10/07 at 15:14)
This is the first time I am in 100 per cent agreement with you.
Unfortunately, I was not trained in any of the areas of concern that you are raised so my blog is about things I have some claim to knowledge which I also think are essential to understand as part of a solution to the broader ecological issues you raise.
How? We still have to take care of people to take care of the planet. We need to produce less and distribute it more fairly yet still engage all the human potential that exists. The neo-liberal paradigm allows people to be wasted in the pursuit of growth, which, in turn, is unfairly (and inefficiently distributed). That is why an understanding of Modern Monetary Theory (MMT) is essential.
best wishes
bill
I taught MMT to 3rd year macroeconomics students at the University of Newcastle.
Economics students in general will follow whatever ideology will earn them the most money for the least possible effort.
Hence, they all rejected MMT. They did the work, and some of them did it very well. But they all rejected it because it was a barrier to their earnings capacity once they left University.
To be honest who could blame them when you think of how little financial reward someone like Bill gets in comparison to the sell-outs with a tenth of his economic knowledge.
As Winston says in 1984.
“If there is hope it lies with the proles.”
Bset of luck with the Bogans.
anon and Bill, Personally I think economics is extremely tied up with planetary destruction and arguing about accounting and financing could be the only hope we have to get an orderly reversion to a sustainable way of living. A few people currently are living sustainably. There was an article in a recent National Geographic about people in an arid part of Tanzania who had lived in the same place in the same way for 100000 years. Up until 5000 years ago essentially everyone lived sustainably. It is only in the last 2000 years that much of the world has engaged in an ever escalating rush to destruction. My impression is that people getting their heads around finance is the key both to driving that destruction but also potentially to pulling back from it. What people most enjoy is often time with their kids wasting time in a forest or whatever. There are people who work 80hour weeks as hedge fund managers and what drives them is the thought of flying across the world to spend a weekend wasting time in a forest with their kids. For most of human history people spent their entire lives wasting time in a forest with their kids. I realize that a very basic lifestyle has it deprivations- but currently half the worlds population is desperately poor and living a much harder life than our hunter gather ancestors. Finance is at the heart of global human activity. Finance dictates that forests are cut down and people migrate and starve each other. To my mind finance currently is directed towards creating a cutting edge of ever escalating complexity and sophistication. It demands greater and greater inequality to achieve that.
Bill “We need to produce less and distribute it more fairly yet still engage all the human potential that exists. ” – I had previously got the impression that MMTers were universally just as much into ever increasing consumption as the most ardent neoliberals. Everyone on here seems to hold out deflation as the ultimate evil even if redistribution were to keep it from harming the poorest. Recognizing the need to produce less seems at odds with such an aversion to deflation.
Andrew Wilkins “Amusingly, I’ve just realised the optimum way to control asset inflation is by increasing progressive taxes on the wealthy” BINGO- that is what I’ve been struggling to try and say with essentially every comment I’ve made on here and was why I tracked down this site in the first place to try and make that point.
Households in the UK often do not save but when you buy a loaf of bread money goes to profits for Tesco etc. Those profits are harvested by high frequency trading of Tescos shares (see Ray’s posts on here describing that) and that gets the money to the investment bank. Also each “little person” involved will be using much of the cut they take to pay off debt and managing that debt gets money to bank profits that similarly get harvested by the ultra wealthy.
Alan Dunn, I do not agree.
Understanding of MMT provides an edge in any macro-economic discussion, be it in a bank or corporate. MMT gives a critical ability to decipher the non-sense and produce valuable analytical and predictive input to business planning. MMT is a super practical theory because it is hardly a theory. One just needs to be careful in pushing the mainstream boundaries with MMT-founded arguments. It is possible and it works. And then people would stare at you and think that you are macro genius. And after that you can tell whatever you want and people will listen 🙂
Stone: re your 4:46 post, I agree that if the monetary base was fixed (in dollar terms) we’d have no long term inflation (asset price inflation or inflation generally). I also agree that this was pretty much the picture prior to World War II. One reason for this was that many countries were on the gold standard prior to WWII.
As to the poor record on the inflation front after WWII, this is not the fault of MMT. For example much the worst inflationary episode since WWII was late 1970s – early 80s. Practically no one was thinking in MMT terms at that time. The phrase “MMT” had not even been invented, far as I know.
MMT simply looks at the status quo (in particular an acceptance of an annual average 2% rate of inflation) and tries to work out the most logical economic policies given that status quo. Obviously given an incompetent MMT regime we could easily get rampant inflation – in fact I personally think Bill Mitchell is too optimistic as to what MMT can achieve. I.e. I think that if Bill was economic dictator of Australia, then Australia would experience serious inflation. But I still support the basic principles of MMT. Economists never agree 100% on anything!
Dear Stone (at 2010/10/07 at 18:10)
You said:
Then your impression was very wrong. I have written in the past about the need for sustainable growth which might not be growth at all. The Job Guarantee is another vehicle where the allocation of resources can be skewed towards green ventures. I also have consistently proposed a major redistribution of income and the dismantling of the financial sector.
Real income should be directed to ecologically sustainable areas of activity. I am on the public record (and I discuss this often in the media) that I would prefer the Australian coal industry to be closed down entirely. That position has brought death threats!
best wishes
bill
I’m all for an economy consisting of fruit picking and 24 hour foot massages.
As long as there are no derivatives trading in massage cream.
Bill, I’m full of admiration that you stood up and said what you believed about coal mining despite death threats. I am still though struggling desperately to get my head around the MMT position that “leakage to savings” is a benign leakage with no link to the growth of the financial sector and their power to influence everything else. From what I can see the ratio of global savings to global GDP is the direct driver of the ratio of financial services as a proportion of global GDP.
Stone,
I know you adressed the question to Bill. But I’m a bit rude and can’t help myself.
I don’t think MMT helps much with that problem. It requires political, regulatory and taxation solutions.
Andrew Wilkins, from what I can see either MMTers should refute the case that having £10T in savings creates a bigger financial services sector than having £10B in savings or they admit that accumulated deficits expand the financial services sector. MMTers already are fully behind the idea that an expanded financial services sector is at the root of much of the political problems. This is the heart of whether deficits matter and that is the heart of most of the MMT stuff I have come across.
Stone,
I intuitively agree with you. My dream solution for the worlds problem is actually MMT ++.
++ Being the unspoken extras I add on to MMT like straight jackets for merchant bankers, LVT, full reserve banking, free solar panels and the like.
MMT is a bloody good start though.
Alan Dunn says:
Thursday, October 7, 2010 at 16:20
“To be honest who could blame them when you think of how little financial reward someone like Bill gets in comparison to the sell-outs with a tenth of his economic knowledge.”
Welcome to Planet Earth and human nature.
All I have read about MMT assumes that humans are willing to share wealth and work towards collective a common good.
Perhaps one day…
Andrew Wilkins, my issue is that MMTers regularly say that a land value tax or an inheritance tax or whatever is good in principle but not politically expedient and/or should be actively directed at bubble hot spots (and so inevitably watered down to the point of uselessness by politics). My point is that the longer the current process goes on the greater the political force will be against any curbing of wealth inequality. To my mind a wealth tax (applied equally across all asset classes including cash) and inheritance tax need to balance government spending over the buisness cycle. Anything less allows the problems to worsen further.
I think it’s a bit harsh to criticize MMTers for factors outside their control or remit. Some of the wealth distribution changes you/I desire can be implemented inside or outside of MMT.
Besides I am hatching a cunning plan to build an army of MMT educated bogan warriors and overthrow the dark lords of finance. I shall invite you and Ray to the first cabinet meeting. We can make all the changes we like. Wish me luck. 🙂
Dear Ray (at 2010/10/07 at 19:59)
You say:
Either you haven’t read very much or you haven’t fully appreciated what you read.
MMT makes no such assumptions. Some of my policy applications of the basic understandings about the monetary system may make those assumptions but that is a separate issue.
The point is that MMT describes the way the system operates (more or less) and allows you to understand what will happen if Policy A is implemented or Event B occurs. It means there is no place to hide when for example a person tries to argue that fiscal austerity will increase growth. It will not do that. But if the aim is to have lower growth, rising unemployment and more deflationary pressure then fiscal austerity is a good way to achieve it.
One can make all sorts of assumptions about human behaviour and still track policy changes via their understanding of MMT. I hope that is now clear. You have to separate out my own application of the principles of MMT which reflect my values from the principles themselves. I try to make that clear – perhaps the separation is not clear enough. I will try harder to be more perspicacious.
best wishes
bill
Andrew Wilkins, I kind of think any successful reconstruction will probably need the “dark lords of finance” to be in on the act but to have turned away from the dark side. Perhaps Ray is such a person but he has said on here that he is against inheritance tax and Matt Franko on here has stated the middle class Americans are already overtaxed (I hope I have not got that wrong). People on here have made comments that not letting savings accumulate so as to “build wealth” is pointless and destructive. The austerity measures in Ireland and the UK are in the very very wealthy nations. Unfortunately much of the austerity is being directed against the least well off. The MMTers though are not saying that people like us in Europe should bring down our levels of consumption but with the austerity deflected from the least well off (eg policies that would lead to asset price deflation). Instead what I’ve been hearing from MMTers is that everyone even the most well off should partake in an escalating permanent boom. Having a JG doing green work could help but it is important to remember that reduce, reuse, recycle is in that order. Doing less can often mean doing less harm. Living in a smaller house, walking rather than driving, not replacing old stuff that still sort of works, that kind of thing makes up for a lot of worthy green projects.
Ray, you seem to say that human nature is to not share and work towards the common good. I think that on a face to face basis with people known personally that is human nature. Things break down when human conduct is abstracted into financial mathematics designing algorithms to say cause a spike in the wheat price. If any of the investment bank workers involved in the 1998 wheat price spike had seen someone they knew starving, they would have sold every penny they had to save them. It is the abstraction of the system that allows us to become so cruel.
“It means there is no place to hide when for example a person tries to argue that fiscal austerity will increase growth. It will not do that.”
Bill, when the Tories say that fiscal austerity will increase growth I took it to mean that the current bust will make space for a future boom. People who sell assets off at the height of booms, then buy at the depths of the busts actually profit very nicely from the cycles. I thought that there was a brutal logic to the procyclic policies as a way to favour the wealthy.
This is to Bill and Ralph, and to Tom H. – though I didn’t see a comment here, I know he eventually will read it.
My support for MMT is limited to its base in monetary sovereignty and what my Dad used to call “the priority use of the money supply for public purposes”.
I have argued that MMT is not sufficiently progressive, leaving in private hands the creation and destruction of the money supply.
I am pleased to have finally learned of the work of Dr. Kaoru Yamaguchi of Doshisha University in Kyoto Japan presented last week at the American Monetary Institute’s Annual conference, where Steve Keen and Dr. Michael Hudson also presented.
Dr. Yamaguchi presented a paper entitled “On the Liquidation of Government Debt Under a Debt-Free Money System – Modeling the American Monetary Act. Dr. Yamaguchi’s paper is available here:
http://www.systemdynamics.org/cgi-bin/sdsweb?P1061+0
An interview where he discusses the results of his work is available here:
http://www.youtube.com/user/EconomicStability#p/a/u/0/iONSua-cvkE
Importantly, the results can be stated as a switch to an alternative macroeconomic structure can result in the eventual elimination of government debt, restoring economic growth with neither inflation not deflation.
Steve Keen’s review on his blog of Dr. Yamaguchi’s work and his model stated that Dr. Y’s model was the most sophisticated he has ever seen, far superior to his own (which is pretty damned good). Steve’s blog also contains a link to Dr. Y’s presentation at the conference.
This is a new day in monetary theory in my humble opinion.
I hope y’all will have a look.
Thanks.
Ralph Musgrave: ” I agree that if the monetary base was fixed (in dollar terms) we’d have no long term inflation (asset price inflation or inflation generally). I also agree that this was pretty much the picture prior to World War II. One reason for this was that many countries were on the gold standard prior to WWII.”
Despite metallic standards, inflation took off in the 18th century, with the industrial Revolution, as I recall reading some years ago. A real hockey stick graph. As for a fixed monetary base, “debasing the currency” has a history as long as there have been coins to debase. 😉
Min, “As for a fixed monetary base, “debasing the currency” has a history as long as there have been coins to debase.” To my mind we now have more capability to have a non-expanding currency than previously. If it was universily accepted that there could only be say 1T USD and each digital USD had a serial number then it would probably be perfectly workable to maintain a “one in one out” balancing of government spending and wealth tax.
PS I’m now listening to an amazing BBC radio4 program about the first encounter of Cook with indigenous Australians. It describes what a remarkably comfortable life indigenous Australians lived at that time in Sydney Harbour!
stone: “It describes what a remarkably comfortable life indigenous Australians lived at that time in Sydney Harbour!”
Ditto the American Indians in pre-Columbian times. (Possibly excepting Tierra del Fuegans, it’s a tough place to live.) Modern hunter-gatherers work about 15 hrs. per week. OC, they may not eat every day, but that’s not necessarily a bad thing. 😉
joebhed, I didn’t get past the first page. Dr. Yamaguchi is clearly misinformed about the nature of the US monetary system when he says:
It is easy to see why he is misinformed. Here is where he gets the information he cites:
[1] Jay W. Forrester. Industrial Dynamics. Pegasus Communications,
Inc.,Originally published by MIT Press, Waltham, MA, USA, 1961.
[2] Edward G. Griffin. The Creature from Jekyll Island – A Second Look at the
Federal Reserve. American Media, California, USA, 2006.
32
[3] E. Robert Hall and B. John Taylor. Macroeconomics. W.W. Norton &
Company, New York, 5th edition, 1997.
[4] N. Gregory Mankiw. Macroeconomics. Worth Publishers, New York, 5th
edition, 2003.
[5] Campbell R. McConnell and Stanley L. Bruce. Macroeconomics – Principles,
Problems, and Policies. McGraw-Hill/Irwin, New York, seventeenth
edition, 2008.
[6] Frederic S. Mishkin. The Economics of Money, Banking, and Financial
Markets. Addison Wesley, New York, 7th edition, 2006.
Tom
I wouldn’t think the work of Prof. Yamaguchi could be failed on the first page, but perhaps those more informed than myself could see it that way.
I would think the work deserved a reading of the macro-economic modeling process, so as to criticize either that process or the conclusions reached, rather than the company he has kept.
Perhaps also you could expound on where a proper dynamic systems model of the macro-economy exists so as to have such considered by Dr. Yamaguchi for his edification. I would be pleased to ask for Dr. Yamaguchi’s opinion.
Except for the fact that MMT is based on a government “sector” where the Treasury, central bank and Fed are collectively equivalent, I don’t see the potential error of the intro section you quoted.
Given that Steve Keen says that Yamaguchi’s model is far more sophisticated than anything he has seen, only flawed in its failure to recognize that loans come before reserves, I would think that those with interest in reading these pages need more of a criticism than the basic economics textbooks of several generations.
Prof. Yamaguchi has proven that it is possible to take that all in and turn the entire system on its head. Which is exactly what is needed.
Thanks.
joebhed to me: I would think the work deserved a reading of the macro-economic modeling process, so as to criticize either that process or the conclusions reached, rather than the company he has kept.
Perhaps also you could expound on where a proper dynamic systems model of the macro-economy exists so as to have such considered by Dr. Yamaguchi for his edification. I would be pleased to ask for Dr. Yamaguchi’s opinion.
Would that I were qualified to do this; however, I am not an economist. So I will leave that to one of them if they have the time and inclination. I suspect that a professional economist may not find the time at this juncture though, since the probability of changing the present monetary system seems low. The more salient point now is using the system we have to best advantage by appreciating its potential and removing inefficiencies.
This doesn’t means that I personally am not interested in a more appropriate solution even if it would involve changing the monetary system. But I am not qualified to work in this complex field. I try to understand what the experts are saying so that I can evaluate it for myself and repeat what I deem good ideas accurately for others.
But I also have limited time. This is not my field, and I have to take time away from my work to look at something. Therefore, I evaluate its relevance to me quickly, and when I find basic misunderstandings at the outset that even I can pick out as a novice, then I not likely to proceed. There is an enormous pile out there and only a limited amount of time to do research. So I think that most professionals work this way. Thanks for pointing it out though.
But if you care to point out some specifics that you think advance the debate, I’ll take look.
Tom,
Thanks for that.
As for the economist’s view that addresses Dr. Yamaguchi’s work, well that’s why I’m pushing it out there. As I said, hating the term paradigm, we’ve crossed a new threshold, so it seems. I hope you watched my interview with Dr. Yamaguchi that I also attached.
That’s what he seems to be saying.
Dr. Y’s model is a comparison.
It compares the present system of debt-money by private bankers with that of the American Monetary Act that, like MMT, is based on monetary sovereignty, with a strong role for the government to protect the nation’s currency and the national economy.
In order to make this comparison, the model of the existing system must be established first, and perfected. Dr. Y. gives his basis in Economics for modeling a macro-economy presently based on debt-money creation.
It shouldn’t surprise anyone that we find lots of error with whomever he was going to cite. If his model of the debt-money system of private fractional-reserve banking is in error, that is very important.
Again, Steve Keen had the highest praise for Dr. Yamaguch’s model.
If it is correct, then the important consideration becomes the alternative model of debt-free money.
Whether all of this is correct can be extremely important to those who think, like Dr. Yamaguchi did at the start of this exercise, that we should look at all viable, alternative structures to this system, and that is why he modeled the proposals in the American Monetary Act.
Now, you may be right that there is no stomach in this country for taking back the money system from the bankers. That remains to be seen.
But, with Dr. Yamaguchi’s work, we cross the economic threshold of whether such an undertaking can provide for balanced economic growth while eliminating the national debt without inflation. People would be working. Because the money system was working.
I know there’s a bunch of people out there to whom such a discussion could be important.
The ones losing their jobs, their benefits, their housing, their public services and their dignity.
Thanks for listening, as usual.
joebhed, the US dollar is not debt-based linked to a private system nor is it debt-based at all. As Warren Mosler often points out, bank reserves are held in demand deposit account at the Fed by banks and foreign government, and they are switched back and forth with savings (time deposit) accounts at the Fed, which is what tsy’s essentially are. These switches are reflected in commercial banks accounts held by the public and businesses if they are invovled. Like all time deposits such as CD in the commercial banking system, tsy’s carry more interest than demand deposits. The idea that the US is borrowing from the bankers is just bonkers. There is no national “debt.” What we call the national debt is not owed to anyone. It is the accumulated savings of nongovernment – 1) the private domestic sector, comprised of banks, non-bank firms, and the public, and 2) the external sector that desires to hold dollars as time deposits instead of as reserves or using those reserves on something else.
If you want direct issuance with no interest payments made on “debt,” just go to no bonds under the present system. There is no operational need to issue bonds at all under a nonconvertible floating rate regime such as the US is now running. This is a holdover from the previous convertible fixed rate system, and it can be discarded as obsolete. In fact, the interest paid is actually a subsidy for those wealthy enough to hold bonds, unless it can otherwise be shown to meet some essential public purpose. As such it is a dead weight and should be eliminated to improve efficiency.
Bill, for example, is on record as recommending no bonds and letting the overnight rate settle to zero when there are excess reserves. Alternatively, if the Fed desired to continue to set the overnight rate even with no bonds, it could just pay a support rate on excess reserves equal to its target rate.
What many MMT’ers would like to see is the cb function and the treasury function explicitly consolidated in one agency that handles both currency issuance and interbank settlement, which is all reserves do.
This is simple to do with a few acts of Congress that simply acknowledge the operational reality of the current monetary system instead of restricting it with obsolete rules or trying to impose an external discipline with rules.
Tom,
Thanks again.
I think I completely agree with everything you wrote after:
“If you want direct issuance with no interest payments….”, because that is what debt-free money would accomplish.
The main difference is that we propose creation of ALL money debt-free, a virtual end to the CB functions, and interest rates set by the free market, recognizing and based upon a guaranteed quantity of money in existence so as to close any potential GDP gap – therefore full-employment.
Remembering that we’re just a few Acts of the Congress Assembled from resolving all of our monetary and fiscal problems….and
That the EMU is just a few more Acts of the EP further away from resolving all of their monetary and fiscal problems…
The reality is that today we are in an economic shithole of debt (and, if that ain’t debt, then I don’t know debt) that is driving us through austerian hysteria to debt-based global peonage a la the IMF model.
So, yeah, theoretically all our problems can be solved through legislation whenever the blinders come off.
I do not however understand your statement that the dollar, our unit of currency, is not debt-based. If any amount of our money supply is going to created today or this week without issuing any debts, my definition of debt-based money, please let me know where that will happen because I want to be there. Coins excluded.
What happens with reserves in demand or savings accounts moving back and forth at will seems immaterial to the matter that each and every dollar of them represents a debt payable to someone.
As Hemphill said – if we had no debts, then we’d have no money. Coins excluded.
Perhaps our definitions of debt require some squaring up.
Sorry, Tom, the idea that the GOVUS is not borrowing from the bankers, among others, is what seems off-tilt. If you want to call the $100B that China invests in US Securities as just holding their savings, then fine. But according to the government accounting rules, we spend that balance on GOVUS goods and services, and then we need to get someone else’s “savings” to pay back China. We need to. Because, it seems, we’re indebted to China for using their $US money.
I have addressed what I see as your shortcoming of not understanding Dr. Yamaguchi’s using traditional economic theory to build the debt-based money system macro-economic model, so that he could compare that model to the debt-free money system model based on the American Monetary Act. At this point, it appears that what you’re saying is that because everyone is wrong except the MMTers, it is not possible to postulate any change without first adopting the full MMT school of thought. I find the variety of thought among the MMTers very healthy, and I wonder aloud whether anyone has built a macro-economic model based on that theory.
I again offer to send that to Prof. Yamaguchi for his consideration.
Thanks.
joebhed: The main difference is that we propose creation of ALL money debt-free, a virtual end to the CB functions, and interest rates set by the free market, recognizing and based upon a guaranteed quantity of money in existence so as to close any potential GDP gap – therefore full-employment.
This iswhat I interpret that MMT’ers are saying about adhering to operational reality under the present system. Reserves and currency are government liabilities but not debt. There is no operational reason to pay interest on them. This is optional – a political choice that Congress can simply change under the present system. There is no operational reason for the government setting interest rates either. They can do better with economic policy based on fiscal. The government needs to manage effective demand relative to potential supply by increasing nongovernment net financial assets (NFA) through deficits and decreasing NFA through taxation.
When you say creation of “all money debt-free,” that means elimination of private banking in which loans create deposits. That is pretty extreme and is not going to happen anytime soon. But government can also control the amount of bank money by regulation, such as capital requirements, since (chartered) banks are “franchises” of government, hence, subject to the rules of the party extending the franchise.
All this is possible simply by removing political restraints voluntarily imposed by Congress. No new monetary system needed. That is plus because it is a lot simpler to remove existing political restraints than to change the entire monetary system in the face of mammoth opposition from vested parties. Even removing political restraints would hardly be easy and would be fought tooth and nail.
I find the variety of thought among the MMTers very healthy, and I wonder aloud whether anyone has built a macro-economic model based on that theory.
I am not economist and am not qualified to speak on the relative merits of economic models. MMT is a macro theory based on SFC models. To see what they look like, consult Godley and Lavoie, Monetary Economics.
Tom, Thanks.
I do recognize some monetary system and policy similarities between the MMTers and monetary reformers because both are essentially based on monetary sovereignty.
If the government can decide to pay no interest on government securities(a political choice), then why would people buy government securities? My use of the term “debt” is something owed to somebody else – so, an IOU – with or without a coupon attached. As such, all money is created as a debt.
“When you say creation of “all money debt-free,” that means elimination of private banking in which loans create deposits.”
It is not the elimination of private banking, it is the promotion of private banking. It is not that banks would not make loans “that create deposits” for the borrower, the banks would make all the loans that borrowers demand, but they would never create the money that is used to make the loan – they would lend other people’s/business’s real money – like people think they do now.
“But government can also control the amount of bank money by regulation, such as capital requirements,…”
Tom, I believe that you agree that the government HAS the authority to create the nation’s money – why would the government, and we the people, strive to manage a private privilege that uses our government’s authority, and rewards those privileged who lend something they do not have(money) and secure assets against a transaction failure that is built into the system? It honestly seems crazy to me. The government has the power to create all the money necessary to meet the potential GDP gap.
Why shouldn’t they?
And, OK, if you will peruse Dr. Yamaguchi’s paper for understanding, I will consult Godley and Lavoie.
Always a pleasure chatting, Tom.