When you’ve got friends like this … Part 5

Today I continue my theme “When you’ve got friends like this” which focuses on how limiting the so-called progressive policy input has become in the modern debate about deficits and public debt. Today is a continuation of that theme. The earlier blogs – When you’ve got friends like thisPart 0Part 1Part 2Part 3 and Part 4 – serve as background. The theme indicates that what goes for progressive argument these days is really a softer edged neo-liberalism. The main thing I find problematic about these “progressive agendas” is that they are based on faulty understandings of the way the monetary system operates and the opportunities that a sovereign government has to advance well-being. Progressives today seem to be falling for the myth that the financial markets are now the de facto governments of our nations and what they want they should get. It becomes a self-reinforcing perspective and will only deepen the malaise facing the world. Today I focus on the Peoples’ Budget proposal recently released by the Congressional Progressive Caucus (CPC) in the US.

The CPC is a Democrat caucus within the US House of Representatives and claims it promotes:

… a strong, progressive agenda … rooted in four core principles that embody national priorities and are consistent with the values, needs and aspirations of all the American people, not just the powerful and the privileged. They reflect a fundamental belief in government of the people, by the people, and for the people.

The four, core principles of the Progressive Promise:

1. Fighting for economic justice and security for all;
2. Protecting and preserving our civil rights and civil liberties;
3. Promoting global peace and security; and
4. Advancing environmental protection and energy independence

I can agree at the “motherhood” level with these principles. They reflect a collective view of society and the interaction between the economic system and community.

The CPC has just put out a budget document they describe as – Peoples’ Budget – which they are representing as a viable alternative to the idiotic positions that the President and the Republicans are currently proposing.

For those interested in the underlying technical discussion to the People’s Budget you might be interested in the Working Paper commissioned by the Congressional Progressive Caucus from the Economic Policy Institute on April 13, 2011.

There is much in the document that is worth considering. They propose a protection of the “social safety net” (health etc) and a withdrawal of troops from Afghanistan and Iraq with a subsequent scaling back of wasteful defence expenditure.

They propose a national public infrastructure investment which will produce some jobs.

They also aim to attack income inequality.

All of this sounds like a credible position for a progressive caucus to have and aim for.

But then you read statements like:

The CPC budget eliminates the deficit in a way that does not devastate what Americans want preserved, specifically, Medicare, Medicaid, and Social Security. Instead of eroding America’s hardearned retirement plan and social safety net, our budget targets the true drivers of deficits in the next decade: the Bush Tax Cuts, the wars overseas, and the causes and effects of the recent recession. By implementing a fair tax code, by building a resilient American economy, and by bringing our troops home, we achieve a budget surplus of over $30 billion by 2021 and we end up with a debt that is less than 65% of our GDP. This is what sustainability looks like.

When you read the

The Peoples’ Budget aims to increase tax revenue by restoring “fairness to a system that unfairly benefited the richest few while hurting the majority of America”. I am not against altering the degree of progressivity in the tax system but first we have to understand what the role of taxation is.

The ultimate aim at the macroeoconomic level is not to collect “more taxes” to balance a budget but to ensure that aggregate demand is regulated to avoid inflationary growth in nominal spending. Yes, it is better to do this in a fairer way and not hand out billions to the top-end-of-town in the false hope that trickle-down will bring prosperity. It doesn’t and hasn’t.

But if the economy is suffering a major aggregate demand shortfall then not replacing the increased tax revenue overall (in the name of fairness) with expansionary spending measures is a mistake. A progressive agenda has to make sure that the fairness agenda doesn’t undermine the government deficit support of employment.

It gets really scary when you read their proposals for the military:

The CPC budget responsibly ends our wars that are currently paid for by American taxpayer dollars we do not have. We end these wars not simply to save massive amounts of money or because the majority of America is polling in favor to do so, but because these wars are making America less safe, are reducing America’s standing in the world, and are doing nothing to reduce America’s burgeoning energy security crisis. The CPC budget offers a real solution to these fiscal, diplomatic and energy crises, leaving America more secure, both here and abroad. The CPC budget also ensures that our country’s defense spending does not continue to contribute significantly to our current fiscal burden – a trend we reverse by ending the wars and realigning conventional and strategic forces, resulting in $2.3 trillion worth of savings. This is what security looks like.

There are two points here – one on which I can agree and the other which …

I consider it obvious that the “war on terror” has largely failed and has made the World less safe and more difficult to deal with (travel etc). I do not see that it has quelled the terrorist threat (whatever that is, and whoever the terrorists are – I consider the US government to be a terrorist organisation). So I agree with the downgrading of America’s military involvement overseas etc.

But it is frightening to read that a progressive caucus can believe that the US military effort is being “currently paid for by American taxpayer dollars we do not have”. That is neo-liberalism personified.

First, the American taxpayer does not pay for anything – please read my blog – Taxpayers do not fund anything – for more discussion on this point.

Second, the American government has all the US dollars that it could ever want to spend. There is no financial constraint on the US federal government. By falling prey to the conservative argument that the US has run out of money, the CPC is undermining the pursuit of the very core principles that it purports to promote.

All the economists etc which have signed up to the CPC budget are equally implicated because they should understand that such a statement is without foundation – it is a plain denial of the facts. But moreover, it plays into the hands of those who want to cut, cut, cut.

All of this culminates in a plan which “eliminates the deficits and creates a surplus by 2021” and achieves a “Primary budget balance by 2014”. The document is full of graphs and scenarios which show how their plan will reduce the public debt ratio cut government spending, increase taxes, and reduce income flowing to bond holders.

There is no proposal to introduce a Job Guarantee which is the surest way of eliminating unemployment and is a way of putting an anti-poverty floor into the economy.

There is no proposal to engage in wide-spread financial market reform. Instead, the People’s Budget aims to impose a “modest” tax on the speculative destroyers of Wall Street.

There is no proposal for a truly national health safety net – a national public insurance scheme (such as in the UK or Australia). Instead, window dressing remedies are proposed to wrest some of the hold that the private insurance industry has on health costs in the US.

The word “unemployment” was used twice in the whole document in the context of insurance – “Extend and Safeguard Unemployment Insurance”.

There was no estimate of how many jobs would be created by the deficit cutting strategy.

Why is it appropriate from an economic perspective to run a primary surplus by 2014? What assumptions are being made about the external sector (currently in deficit) and the private domestic sector (currently trying to reduce its high level of indebtedness)? Why is a contractionary budget position correct in 2014 when the economy has not been creating enough jobs for at least a decade (see below)?

When I read the technical document I found nothing to justify the budget deficit cuts in terms of viable movements in sectoral balances. Only general references to “fiscal crisis”. What crisis? There is no fiscal crisis in the US. There is a political crisis because the conservatives who created the recession are trying to maintain their position at centre stage. The “progressives” have lost ground because, like the “Peoples’ Budget”, they have chosen to fight the battle on the basis of a series of false premises pertaining to the US fiscal capacity.

These are all political statements with no foundation in an understanding of the way the monetary system operates. At the core of the Peoples’ Budget is the erroneous belief that the US government is running out of money. It is not and once you start from that position all economic logic fails.

What the US economy needs right now is further fiscal stimulus not less. The Peoples’ Budget fails to explain how cutting the deficit – particularly the primary deficit in 3 years will allow growth to occur and employment to significantly increase.

All proposals at present which involve cuts to the deficit are undermining the capacity of the US economy to generate jobs.

I do not consider the “Peoples’ Budget” to be a progressive document nor worth rallying around.

I thought the following analysis was relevant to my view of this “progressive input”. You can get the data I use in this blog from the US Bureau of Labor Statistics (for all labour force data) and the US Bureau of Economic Analysis (for the National Accounts data).

The Employment-Population ratio is sometimes used as a more accurate guide to the underlying state of the labour market because it is a more pure ratio than the unemployment rate.

The latter is computed as total unemployment expressed as a percentage of the labour force. So both the numerator (unemployment) and the denominator (labour force) are sensitive to the business cycle, the latter via the participation rate (which falls in recessions and rises in booms).

So a falling unemployment rate might just be achieved by an exodus of workers from the labour force as a result of them being discouraged by the lack of employment opportunities (this is the basis of the hidden unemployment classification that economists talk about).

The Employment-Population ratio is cleaner because only the numerator (employment) is cyclically sensitive. The underlying population scale is relatively stable. So a rise in this ratio is usually unambiguously good and vice versa.

The following graph shows the US Employment-Population ratio from January 1960 to March 2011.

Clearly, the April 2000 peak of 64.7 per cent was wiped out by the recession that followed in 2001. That was the recession that saw the economy collapse under the fiscal drag created by the Clinton surpluses.

The Employment-Population ratio rose slightly in that recovery (reaching the most recent peak of 63.4 per cent per cent in December 2006). You might think that 1.3 per cent (the difference between the two peaks is not that much). In terms of jobs it amounts to jobs that were not regained (in proportional terms) between these peaks. That is, one way of looking at the 2001 recession which dragged on between March and November.

If employment had have kept pace with the increase in the population between those peaks (that is, the Employment-Population ratio had have stayed at 64.7 per cent) then by December 2006, employment would have been 148,963 thousand rather than 145,970 – that is, nearly 3 million jobs more.

This employment gap becomes more significant in the downturn that followed the financial crisis. If the Employment-Population ratio was at its April 2000 peak (64.7 per cent), then employment in March 2011 would have been 154,687 thousand instead of its actual value 139,864 thousand. That is, nearly 15 million jobs have gone missing over the decade or so.

That is the problem that the US faces and the it started well before the financial crisis. The US economy hasn’t been generating enough jobs since 2000 and the financial crisis exacerbated that decline.

We can also decompose the Employment-Population ratio into private and public sector components. In April 2000, at the peak of the ratio, the private employment-population ratio was 52.3 per cent whereas the public ratio was 12.4 per cent.

By December 2006 (the next weaker peak after the 2001 recession) the private employment-population ratio was 49.9 per cent and the public ratio was 13.5 per cent.

By March 2011, the private employment-population ratio was 45.4 per cent and the public ratio was 13.1 per cent.

The following graph shows you the evolution of the private and public employment-population ratios. The message is clear – the private sector in the US has lost its capacity to produce work (and I am ignoring quality issues here which would further demonstrate the malaise).

So in the period where the economists were pronouncing the “business cycle was dead” and that the US had entered the period of the Great Moderation the US economy was failing in its primary functions – to produce work.

Please read my blog – The Great Moderation myth – for more discussion on this point.

In the period where the neo-liberals were successfully pressuring government to deregulate the labour market, the welfare system and the financial system and reduce the power of the unions etc – claiming that the market-friendly policies would generate unprecedented wealth for all – the US economy was faltering – long before it collapsed under the weight of these poor policy choices.

This is the problem that has to be addressed. The US has become obsessed with redistributing real income to unproductive sectors such as the financial sector which is not a large creator of employment. The policy debate is now totally moribund because the focus is on the wrong thing.

There is not a budget deficit problem. There is a growing long-term problem in the government incentives given to the private sector which have encouraged wasteful and destructive financial speculation at the expense of real wealth production. A progressive proposal that doesn’t attack this malaise head on is missing the point.


Once again, if this document from the Congressional Progressive Caucus in the US. represents the apex of progressive influence in the US legislature then the nation is in for a sorry future.

That is enough for today!

This Post Has 44 Comments

  1. Strikes me that the reason the CPC (and the political right) won’t accept a continued deficit is that they think this means an expanding national debt. That of course is nonsense because a deficit can perfectly well accumulate as extra monetary base rather than extra debt. Indeed, Warren Mosler advocates a “zero debt” regime, with any deficit accumulating ENTIRELY as extra monetary base: a policy I agree with.

    Having got that idea into the thick skulls of the CPC and the political right, the next step is to persuade them that expanding the monetary base does not necessarily lead to inflation. The fact that the US monetary base has doubled in the last two years (which is totally unprecedented) and with absolutely no discernable effect on inflation, might help persuade them.

  2. I live in North Carolina. Yesterday I heard on the news that the NC House would not take up the issue of extending unemployment benefits and it told how many thousand people would lose their benefits. Their reason: they were too busy with more important matters. No one elaborated, but they didn’t even make any claims about balancing the budget, they are just too busy.

  3. “What goes for progressive argument these days can really be a softer edged neo-liberalism.”

    That reads like too sweeping an indictment of alternative, non-mainstream proposals out there. Perhaps a “sometimes” is needed, instead of “really”.

  4. Dear Mr Mitchell

    You did not specify what population was used in the employment/population ratio. Obviously, it is not the total population because people under 18 and over 65 are usually not in the labor force. If total population is used, then long-term comparisons are misleading because of changes in the age distribution.

    Even if we use the population between 18 and 65, the ratio can vary over time due to aging because generally people between 25 and 35 are more often in the labor force than those between 55 and 65. Of course, that is not true for the short term, so all your conclusions are valid.

    Regards. James

  5. Your graph shows the employment population ratio was strikingly low in the full employment period of the 1960s and early 1970s. I guess more people were choosing not to work then.

  6. Stone,

    those periods were very much associated with single family incomes were they not? ie. Women, as one example, only really began to enter the workforce at a later date (for various reasons). But they would still have been captured by the “working age population” data, even if they were not part of the “labour force”.

  7. GLH says:
    ‘I live in North Carolina. Yesterday I heard on the news that the NC House would not take up the issue of extending unemployment benefits and it told how many thousand people would lose their benefits. Their reason: they were too busy with more important matters. No one elaborated, but they didn’t even make any claims about balancing the budget, they are just too busy.’

    I also noted the tv statement (I live near Raleigh), however, I was not surprised. As Bill noted several weeks ago, Paul Krugman has apparently become familiar with several claims which MMT-advocates have voiced, however, the fact that he invited comment (of which much was made available in the NY Times comments section as well as on numerous blogs) has not been been taken maximum advantage of by Bill Mitchell, LR Wray, Warren Mosler, Mike Norman or several other prominent bloggers.

    In no way do I intend to diminish the arguments presented by MMT advocates on that occasion, however, imho, the only way the MMT advocates are ever going to succeed is by dumbing down/clarifying the message so that it may be comprehended. The ones who might benefit the cause advocated by the MMT proponents include (a) those economists whom Bill categorizes as neo-liberal or conservative as well as the precious metal proponents (b) others who, while not economics professionals, do wish to be able to comprehend discussions of economics (politicians, lawyers, and any number of other professionals who have little time or interest in becoming economists. In this regard, recall that Paul Ryan obtained a bachelors degree in economics prior to joining Jack Kemp). I will again suggest that the MMT experts may find that employment of audio/visual teaching tools, including comic characters, cartoons, animation, etc in a classical form or in a video has the potential to reach a wide audience and make a lasting impression. In recent months, several such efforts have appeared on individual blog sites, however, they haven’t been well thought-out and, thus, have served only a very limited purpose.

  8. Thanks, Bill. I was hoping you would address this. And yes, it seems only too probable that America is in for a very sorry future in the near term. The Obama administration has barely altered the trajectory of the course set by the looney-toon right.

    I see no political chance for a genuinely and explicitly progressive proposal coming out of Washington. Not now or for years to come. The corporate lock on opinion and the media, combined with heavily funded lobbyists, is just too strong. But it is a case of trends that can’t continue coming to an end. The acceleration of wealth-transfer to the ultra-rich is the most unsustainable trend I can imagine. As the real economy stagnates and millions more people are marginalized, a social rupture of some kind must ultimately occur.

    I think progressive Americans should focus on state and local issues, and try to put forth authentic policy positions that are consistent with MMT and the post-Keynesian “Kansas City School”, even though state and municipal governments can’t implement explicitly MMT-based policies.

    My short list (for a state like mine – Wisconsin):

    1.) Raise the minimum wage until its real purchasing power matches that of 1975.

    2.) Outlaw the payday loan “industry.”

    3.) Charter a state bank to handle the state’s revenues.

    4.) Impose a one percent Alternative Minimum Tax on companies with more than fifty employees.

    5.) Impose a one percent surtax on non-housing-related capital gains.

    6.) If there is still a deficit in any given year, impose a surtax big enough to close the gap on incomes over $250,000.

  9. Bill,
    I agree totally with your assessment that the US is a terrorist organization. It is in fact the largest one in the world. While many of us in this country do not agree with the policies put forth in our names, a majority of the US populace does. Millions of boomers protested the Vietnam war because they thought they might be sent there and killed. Now that there is no draft the endless war on terror has been relegated to background noise at best. While I agree with you that the progressive movement has no understanding of the advantages our monetary system affords us, I am beginning to wonder if it is not just as well they don’t. If any country needs to get it’s spending priorities straight it’s the US. I’m starting to think that the pain caused by budgetary restraint might be the best way to get our electorate to put a leash on the military, even if those budgetary restraints are neoliberal/conservative bunk. Simply put, I don’t think we have the maturity as a country to properly use MMT. We’ll just engage in more of the same bad behavior.

  10. stone: “Your graph shows the employment population ratio was strikingly low in the full employment period of the 1960s and early 1970s. I guess more people were choosing not to work then.”

    Yes. Housewives. 🙂 The recent surge in the feminist movement dates to around 1970.

  11. William Wilson, You are quite right. Do you know of anyone who does animated cartoons – or does anyone else? There ARE animated cartoon systems available on the net, but I haven’t got time to get to grips with them (apart from the ultra simple ones – but they’d be TOO simple). But I’d pay someone to produce something, with me and some other MMTer producing the basic ideas. Suggestions anyone?

  12. ***The fact that the US monetary base has doubled in the last two years (which is totally unprecedented) and with absolutely no discernable effect on inflation, might help persuade them.***

    OK, Devil’s Advocate:

    I know MMT likes to combine government bonds and monetary base together and call them “net financial assets”. We then speak of the private sector’s desire to hold more or less of these NFA.

    However, bonds are obviously different from cash in that they pay interest. If all of the savers out there who currently hold bonds would just as willingly hold cash (were bonds to go away), it would absolutely be true that monetizing the existing government debt would have no real-world impact.

    What if private saver’s tolerance for holding cash balances was much lower than their tolerance for holding bonds? In that case they would seek to shed that excess cash and purchase other financial assets, or possibly foreign financial assets. Of course, in aggregate, the private sector cannot remove that excess cash (monetary base) from the system … only the government can create or destroy NFA (via spending or taxing). But that won’t stop each individual saver from trying to get rid of their excess cash, and in doing so drive up prices (most likely asset prices to begin with, since the people now holding bonds tend to be savers rather than consumers).

    So …. lately we have been experiencing a rising stock market and a falling dollar. It is quite possible that these things have nothing at all to do with an expanded monetary base. But how would you demonstrate that if presented with the argument above?


  13. Ralph, the RSA Animates animated whiteboard graphics video depcting images from David Harvey’s lecture on the cause of the financial crisis (from Marxist perspective) is certainly one model for animated MMT. I use this short video (about 5 minutes) in many of the classes I teach — I think it is that good. I am assuming you have seen it? I don’t have the web reference at hand, but I just Google using Harvey’s name.

  14. Ralph – much as I applaud your zealous leanings, don’t you think designing cartoons which amuse, grip and inform, is a bit premature when we don’t even have a decent wikipedia page?

    Despairing of ever having Scott get one of his PhD students do a complete overhaul on it, I think the page requires a small group of 3-4 MMT amateurs agreeing on a decent ToC and then supplying content and footnotes from the various MMT papers and blogs.

    What do you think?

  15. Ken – that’s certainly the monetarist account: money flying around as agents try to rid themselves of excess cash balances – with the only way being inflation in asset or consumer prices.

    One can argue that such a mechanism is not _necessary_ for the post-QE trends seen in asset prices; all that is necessary for these trends is that misguided investors wrongly expected the mechanism to work.

    I’m not sure the mechanism is _sufficient_ as it stands either. Since the private sector can remove cash balances from circulation by repaying loans – and given how financialised economies are these days, there would be plenty of opportunities for the increased cash balances to be depleted without leading to increased prices.

  16. Why doesn’t Bill just condemn non-MMT progressives as Social Fascists and be done with it?
    One important historical lesson I’ve learned from studying progressive and revolutionary movements is that those parties who build broad coalitions for reform, even if they disagree on the details or do so from a cynical “Popular front” perspective, are more likely to succeed than those insisting on doctrinal purity.

  17. Ralph Musgraves:

    I have left suggestions at various MMT blog sites to suggest that the message(s) which MMT advocates wish to convey to others (whether they be economists or other professionals who simply wish to learn a new way of conceptualizing macroeconomics) might best be accomplished by producing well-thought-out audio/video messages which employ techniques such as animation, cartoons, comic strip-like sequences and the like. The two main problems with such an effort involve (a) design/message creation and (b) cartooning, animation, or similar techniques to facilitate video creation. As I am a retired biochemist who knows a bit about teaching techniques, but who has neither the appropriate background or technical skills, you might think it a bit presumptive to offer these sorts of suggestions, however, it is clear that many economists, most financial bloggers and no politicians seem to ‘get it’.

    The RSA animation of Dave Harvey’s 30 min video ‘The Crisis of Capitalism’ was the basis of the 11 minute animated video linked below:



    I have tried to locate Richard Heinberg’s animated video which was designed to promote his book ‘Blackout’, however, it appears to have been removed. His book is described:


    The animation technique was similar to that mentioned above for Dave Harvey’s speech, thus I wrote to Heinberg to get information on production of his animation video. Mr Heinberg’s postCarbon inst. associate – Tod Brilliant – replied to inform me that Mr Heinberg was tied-up/on vacation. Mr Brilliant also added the following note:

    ‘As far as animations go, it may be a solid bet to simply pen a script. Keep in mind that you’ll want to limit your effort to somewhere around five minutes, as attention spans (so sad to say) flag mightily and views drop when you get much past that IN GENERAL (always exceptions). Once you’ve done this, it may be easier to attract someone who would want to foot the bill to have it made. The team we used, Monstro Design, cost us about $5500. The team who makes the RSA animate versions charges closer to $15,000’

    I did not follow up with an inquiry to Monstro Design (presumably, some UK outfit) as I was not prepared to proceed on my own. I recognized that I did not have the talent/funds to accomplish anything.

    I subsequently came across several videos on a website maintained by Brendan McCooney who has a blog site Kapitalism101.com. I wrote to indicate that I had been looking to find a blog site which uses a similar animation technique to illustrate the basics of MMT as such animation videos could be put up on YouTube.com or other sites and get a much wider audience/viewership. I mentioned that I would appreciate his advice in any attempts to locate someone who shares enthusiasm for this idea. I left a comment at his site on Feb 8, 2010; it was never answered:


    The videos produced by Brendan McCooney impressed me as they conveyed messages which could be understood by undergraduates without much economics background. B McCooney appears to be a college student (Drexel Univ) who was interested in interpretation of Marx’s book ‘Kapitalism’ and he produced an accompanying text to facilitate further explanation.

    I have left suggestions at 6-8 MMT blogsites over the past several months as I usually read a lot of comments indicating that the MMT advocates continue to encounter resistance to ‘the message’. It seems as if it will take an enthusiastic advocate a while to coordinate/produce effective instructional videos; perhaps, a textbook author and a student artist/cartoonist could do the job right.

  18. Ken, you should not at cash only. Economy is full of zero-maturity assets and these also include demand deposits in the banking system created by loans. So let me suggest another way that private sector can get rid of unwanted zero-maturity assets: cut down bank borrowing. And now it leads us to a whole new set of unexpected (i.e. anti-monetaristic) consequencies (QE including).

  19. Ken said:

    “What if private saver’s tolerance for holding cash balances was much lower than their tolerance for holding bonds?”

    What plausible scenario represents your description?

  20. OK …. zero maturity assets 🙂

    So yes … paying down loan balances is a reason the private sector might demand money vs bonds.

    However … somebody out there is holding 14T in government bonds right now. Will these people or entities be OK with holding zero maturity assets instead if the entire federal debt is monetized and bonds are done away with? If they are not, would this cause a problem?

    Perhaps I need to distinguish between bonds held by banks vs non-banks. Banks can only swap back and forth between bonds and reserves and would have no option if I understand correctly. What about non-bank savers?

  21. Ken, “However, bonds are obviously different from cash in that they pay interest.”

    -Am I right in thinking that bank reserves do actually pay some interest (0.25% in USA, 0.5% in UK)? Bank reserves seem to me to be a perpetual bond that pays variable interest? To my mind that is a better description than the “bond of zero maturity with zero interest”.

  22. From my understanding the Fed quite recently acquired the authority to pay interest on reserves and although the rate they pay now is quite small, they could raise it in the future and use this mechanism as an alternative to OMO to control Fed Funds rate. This may be their only option if they want to raise Fed Funds in the near term until all of the excess reserves introduced via QE, etc can be drained from the system.

    I’m still wondering about that portion of treasury bonds held by non-banks, and what the consequences would be if these savers don’t have the same appetite for holding money as they do now for bonds.


  23. Ken “I’m still wondering about that portion of treasury bonds held by non-banks, and what the consequences would be if these savers don’t have the same appetite for holding money as they do now for bonds.”

    -I guess appetite for holding any asset -whether cash, bonds, land, stocks or hoarded commodities- is down to expected returns and liquidity preference (ie whether it can be sold quickly and with low transaction cost). If people are left with cash and it has lower expected returns than they are happy with, then the cash will get exchanged to and fro until the prices of other assets get pushed up to the point that they no longer provide greater expected returns than cash does. A cushion of cash allows people to tolerate greater volatility in the prices of the other assets they hold. I guess if the gov acts so as to cause a further build up of cash that pays a negative real interest rate, then the result will be (currently is) inflating and increasingly volatile asset and commodity prices.

  24. Ken,

    Evidence suggests that were safe treasury bonds unavailable, the prospective buyers of them would choose to hold cash. What is the scenario you imagine where this is not true? I think a strong case could be made that under any circumstance where those buyers would not choose cash, they wouldn’t choose to buy treasury bonds either.

  25. Ken – I have had tried to argue MMT with monetarists and they are absolutely focussed on the bank vs non-bank distinction.

    If you speak to a savvy monetarist, they will be fine with QE if it’s buying bonds from banks, since they know that CB reserves don’t create inflation. But they share absolutely your concern that buying bonds from non-banks increases cash balances amongst guys who (they maintain) don’t have debt to pay down – leading to asset price inflation. They then claim that asset price inflation leads to consumer price inflation but they are a bit vague (to my knowledge) on the transmission mechanism.

    Incidentally, monetarists don’t even like ‘sterilised’ budget deficits which involve selling bonds to banks, since (in their mind) since this increases deposit balances amongst non-banks.

  26. Sergei – I invariably find your comments clear and helpful – sometimes even more so than the big MMT ‘names’. Do you have a blog?

  27. Anders “If you speak to a savvy monetarist, they will be fine with QE if it’s buying bonds from banks”

    -Don’t “universal banks” such as HSBC, BNP Paribas etc etc hold a diverse range of assets on their own account. Buying bonds from a universal bank is just as likely to cause the investment banking arm of that bank to speculate with wheat or oil as is buying bonds from a pure investment bank or hedgefund. Asset price inflation leads to commodity price inflation because once assets become overvalued there is no longer an opportunity cost to hoarding commodities. Earlier this year Goldman Sachs were cheer-leading a CCCP trade (long copper, crude, cotton, & platinum). It doesn’t take much imagination to see how price spikes in those commodities create costs for manufacturers that feed through to higher consumer prices. It seems to me a case of the extra liquidity providing the commodity speculators with a means to exert a cost drag on manufacturers .

  28. Stone – if the CB buys bonds from banks, it settles them with CB reserves, not deposits. So if HSBC wants to speculate with some risk assets, it can’t use its new CB reserves to settle the trade – unless it buys them from a BNPP, in which case HSBC moving from reserves into risk assets is offset, systemically speaking, by BNPP moving from risk assets into reserves.

    I agree that if some QE has really generated asset price inflation (the jury appears to be out on the current round of QE, unless one is satisfied with post hoc propter hoc), then yes this may include or lead to commodity price inflation which will lead to consumer price increases. But for these price increases to lead to inflation, the increases will need to get validated by agents with market power (unions, wage inflator clauses, high resource utilisation); otherwise, the increases will dissipate (like the UK VAT rise and GBP devaluation willl do), with the elevated CPI representing just a relative value shift.

    The thing is, monetarists think any increase in CPI above target is wrong, however short-lived.

  29. The thing is, monetarists think any increase in CPI above target is wrong, however short-lived.

    True, on the other hand MMTers easily dismiss any increase as a one time increase. But you can’t tell in advance whether it will be short-lived or validated by agents with market power. That will depend on the size of the increase, the market power of those agents, which also depend on past inflationary experiences, etc…

  30. I am more generous regarding the confused and uninformed than you are Bill. I have participated in the developing of a Canadian version of a people’s budget. My colleagues whom I have known for 10-20 years are in favour of social advancement for the vast majority of people, a fair and equitable economy, poverty reduction, improved and expanded social programs, expansion of unions, an environmentally friendly shift in society, etc. Unfortunately 40 years of neo-liberal propaganda and social pressure have made them, and me until recently, think small. I think that is one of the biggest successes of the neo-libs: get the other side to think small. MMT requires thinking big, essentially ‘let’s just do what has to be done’, there is a lot to do, let’s get started now, and it has to be led by the federal government. On the economics of it, once you have been through neo-lib training it is difficult to get your head around the fact the federal government is not like a gas station. I know I had a hard time with it. And the politics of it are very difficult to sell. The federal government as gas station is easy to understand intuitively by the general public. Selling MMT in a public forum… would be very difficult under current circumstances.

  31. Anders “unless it buys them from a BNPP, in which case HSBC moving from reserves into risk assets is offset, systemically speaking, by BNPP moving from risk assets into reserves.”

    -Doesn’t bidding the price of anything up entail passing money to and fro in that way? The bank reserves don’t need to be transformed in anyway to push up the price of what is being bid for, they just need to be passed to and fro. Sorry if I’m missing something really obvious.

    About commodity price inflation- It is more a case of the manufacturers having to pay a toll to the commodity speculators. I guess at some point the drag from commodity prices leads to a stock market crash as manufacturers start making losses due to increased commodity costs. After the crash, the risk asset of the day will once again be (the now low priced) stocks, as those become overvalued, commodities will gain favor and the cycle will repeat. I agree that all of that could be classed as not constituting inflation. It is just cycles of price spikes. It does cause massive waste though.

  32. Mammoth – fair point; but there is lots of data which ought to support a reasonable consensus on the level of market power (surveys, wage settlements etc). Monetarists, though, talk about inflationary expectations, which has nothing to do with market power per se.

    It would be good to look at a test case – assume that we can all agree the level of market power is low, and that there is an 80% chance the UK’s 4% ish CPI will tend to 2% within 12-18 months. Then you can test monetarists by saying “would you vote for a rate hike, even if this would hurt real GDP growth by 3% points?”

    The monetarists will always say:
    (i) “inflation risks are asymmetrical”, because they hark back to periods/countries with much greater market power, when a vicious spiral could {easily} take off;
    (ii) “need to crush expectations”, because they think agents negotiate contracts and set prices with an eye to the CB base rate

    What it comes down to is that ultimately monetarists would prefer real GDP growth to be lower by 3% than for inflation to be higher by 2%.

  33. Anders, I feel honoured but without big MMT names I would have been nowhere. Like most of people here. And there is still long way to go.

    And I do have a blog but it is not in English 🙂

  34. “Evidence suggests that were safe treasury bonds unavailable, the prospective buyers of them would choose to hold cash. What is the scenario you imagine where this is not true? I think a strong case could be made that under any circumstance where those buyers would not choose cash, they wouldn’t choose to buy treasury bonds either.”

    Would be interested in hearing the case and seeing the evidence …. do you have references?



  35. Don’t “universal banks” such as HSBC, BNP Paribas etc etc hold a diverse range of assets on their own account. Buying bonds from a universal bank is just as likely to cause the investment banking arm of that bank to speculate with wheat or oil as is buying bonds from a pure investment bank or hedgefund.

    So … my understanding (mostly from reading MMT blogs) is that banks will lend to qualified borrowers regardless of their reserve position, because they can always obtain the required reserves later. So I’m assuming that the activities you mention (to the degree that they’re allowed … not sure about that) … would fall in the same category … if it’s deemed a good risk and profitable the bank will do it regardless of reserves. Therefore, exchanging bonds for monetary base will make no difference in regard to the bank’s activities in the real economy.

    That’s why I’m focusing on government bonds held by the non-bank public.

  36. Ken,

    Do you have references / evidence / or even a plausible scenario where current holders of treasuries would shun cash were treasuries unavailable? Only if we start looking at specific scenarios can we test my hypothesis. I may have a poor imagination, so I’m asking you to describe the real world circumstances you imagine could cause what you describe.

  37. To William Wilson,

    I have seen you leave that comment across several MMT blogs and I can assure you we’re all partial to the idea. Finding someone with the time and skillset is the difficult part.

    Given the trouble that MMT is having with MMT advocates editing the http://mmtwiki.org/wiki set up by Selise I don’t foresee the animation option being resolved any time soon

    To Anders,

    The MMT Wikipedia page, “Chartalism” has come a long way since I first came across it. I note that there are now also wikipedia pages on Warren Mosler and Bill Mitchell

    To all MMT sympathisers & empathisers,

    MMT has made great progress and is leaping into mainstream blogs, that’s a good first step but it is only one of many – the next step is into the broadly consumed mainstream media and as they teach you in political campaigns just as you’re sick of saying the same thing over and over again, the wider public is only just beginning to take notice.

    Kind Regards to you all


  38. I don’t have any evidence one way or the other. Just seems plausible to me that public’s willingness to hold a zero maturity asset may not be the same as their willingness to hold an interest bearing one. If you know of evidence on this point I’d like to look ….


  39. To William, Ralph, Sennex, (cartoon doco on MMT)

    I’d like a dollar for every time I’ve been asked where’s the video, where’s the doco, when trying to explain MMT.

    There’s only one cartoonist (in the world) who could do the subject justice, and that’s the Australian Bruce Petty. I think he might be still drawing for “The Age” although he’s well past what most of us would call “retirement”.

    Not only is his draftsmanship exceptional, but Bruce Petty (from what he’s said and written) would be a perfect fit philosophically with the underlying ethos or potential for social purpose.

    Here’s something from his bio in “the Age”:

    “Petty says the challenge of being a political cartoonist today is more difficult in the era of globalisation. “I suppose it is traditional that political cartoonists take on people with power in the community. There is now even more important, more anonymous, figures who run our global, corporate world. These non-elected people decide more than politicians what goes on and make decisions where all our wealth and the wealth of this country goes. We [cartoonists] keep drawing politicians but the real power is often with a different set of people. We draw them as a vague, ominous people.”

    And As Age journalist Martin Flanagan once wrote:

    “Petty was revolutionary. He re-invented the world as a vast scribbly machine with interlocking cogs and levers that connected people in wholly logical but unlikely ways.”

    A Petty cartoon/doco lampooning neo-liberal economics might well spell the end of it.

    If anybody knows Bruce Petty please ask him what he’s doing these days. I know he’s talking to Julian Morrow at the Riverside Theatres in Parramatta this Saturday night…

  40. Ken,

    If you can’t imagine a plausible scenario where this occurs why is it worthy of anyone’s concern?

    Your framing of the character of the assets as “zero maturity” vs “interest bearing” misses important information. Cash deposits are interest bearing. Treasuries of any maturity are close enough to “zero maturity” – they never take long to sell.

  41. Ken “I’m assuming that the activities you mention (to the degree that they’re allowed … not sure about that) … would fall in the same category … if it’s deemed a good risk and profitable the bank will do it regardless of reserves. Therefore, exchanging bonds for monetary base will make no difference in regard to the bank’s activities in the real economy.”

    Two points you make are whether universal banks conduct commodity trading on their own account and whether bank reserves help that. I just googled about commodity trading by universal banks. I seems to be done a lot eg:

    “Barclays will be targeted during its annual meeting on Wednesday by anti-poverty campaigners accusing it of playing a leading role in driving up food prices on global commodities markets. Barclays Capital, the investment banking arm of the high street bank, is the UK’s biggest player in food commodity trading”

    About whether Barclays could buy £1B of wheat just as cheaply if they had 50year gilts rather than bank reserves- there are frictions and costs for banks that are avoided if they can use reserves. If reserves were totally useless why would they willingly exchange bonds that pay 4% interest for reserves?

  42. If you look on the Fed’s web site, they are explicit that they want primary dealers to act as intermediaries so that other people can sell bonds. They say:

    “Who is eligible to sell Treasury securities to the Federal Reserve under this program?
    The Federal Reserve Bank of New York’s primary dealers are eligible to transact directly with the Federal Reserve. Dealers are encouraged to submit offers both for themselves and their customers”

    So they presumably also want hedge funds etc to sell bonds (via the primary dealers) and buy other stuff instead. I’m also still under the impression that “universal banks” have investment banking arms that are in effect hedge funds.

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