Going right to the top in Europe

This Post Has 35 Comments

1. I’ll have whatever Bills drinking. Great stuff!

2. The note of gallows humour in the posts is getting stronger it seems. I take it the ‘Train is about to crash and I am powerless to stop it’ feeling is growing…

3. Good description overall except for the conclusions!

   “2. Bail itself out when the bond markets are not willing to fund it on their terms – or in yesterday’s case – not even fund it on any terms.

   While the Germans are preaching to all and sundry about their insistence that the ECB should not be funding government deficits, what the Germans did yesterday is not that far removed from that.”

   No hanky panky happening there!

   There is absolutely no reason a big deal should be made out of this.

4. That post is absolutely spot on.

5. @Neil

   How long until we hit the buffers and what speed will we be doing?

6. Thanks, you found some essential details I didn’t see elsewhere. Also .. the length is short enough to make it an easier read than your usuals ;^)

7. OMG. Bill… Thank you… thank you… thank you. This fills a major gap in my econ/finance education – as yet unofficial, but to begin in earnest in 2012. I have always wanted to know about this process, and in the absence of scouring through older posts you referenced, today’s was golden for all you explained and for toward guidance further details. AWE+SOME. Cheers.

8. I still say they should write “PIIGS” as “GIPSIs”. It’s so much more in keeping with the continent’s history of zenophobia.

9. How coincidental. A certain Fabian Lindner has posted an article on the Gauardian which covers similar ground to your’s Bill.

   http://www.guardian.co.uk/global/2011/nov/24/debt-crisis-germany-1931

10. Bundesbank publishes an average yield of german publich debt. It is called “Umlaufrendite”. It dropped from above 5.0 % in 2002 to 1.5 % a few weeks ago. Now it is well above 1.8 %. Look at this Chart

    http://www.onvista.de/anleihen/snapshot_weitere.html?ID_OSI=1490830&TIME_SPAN=10Y&VOLUME=0&TYPE=LINE&SCALE=abs&DISPLAY_TYPE=LINE&SUPP_INFO=0&AVG1=0&AVG2=0&ID_NOTATION_COMP1=0&ID_NOTATION_COMP3=0&ID_NOTATION_COMP4=0#chart_01

    Therefore I consider your following statement as absurd: “The story has more to go yet though because the Euro crisis is heading right into the core. “

11. “Therefore I consider your following statement as absurd: “The story has more to go yet though because the Euro crisis is heading right into the core. “”

    You and seemingly most of the German population. That is precisely the problem.

12. Dear Dr. Oliver Strebel (at 2011/11/25 at 2:28)

    And what were the bid yields (prices) that the Deutsche Finanzagentur rejected on Wednesday when they stopped the allotted lowest yield at just above par and “bought” a record amount themselves for “secondary bond market operations”? They don’t make that information publicly available.

    And what will be the discounts they have to wear when they offload that “record withdrawal” in the secondary markets?

    Clearly they managed to keep publicly available yields on primary issue low – by “buying up the debt themselves”. Time will tell.

    best wishes
    bill

13. 10 year German bonds 2.21% and rising. 20.15pm UK time.

14. This was exactly what I was looking for! A German had told the Bundesbank acted as a resort lender. It’s not the Bundesbank, but they have a manipulation mechanism as well 🙂

15. “While the Germans are preaching to all and sundry about their insistence that the ECB should not be funding government deficits, what the Germans did yesterday is not that far removed from that”

    I’d say it’s somewhat removed from that, at least operationally. The government could only do what it did if it already had sufficient cash in its deposit account at BUBA. That’s what allowed it to hold back more bond issuance than usual, thereby allowing it flexibility in effective timing of bond issuance, and in managing the effective yield cost. And that sort of cash position is the inverse of the ECB funding it. There was no new cash associated with the bond holdback.

    That’s not to say in time they won’t end up being funded at the ECB. But what they did here is an indication of operating cash strength, not weakness. They have not yet received the memo from Warren Mosler to the effect that “governments neither have nor don’t have money”.

16. @Bill: The debt was not “bought” by the Bundesbank, it was just not issued for later sale on the market for a better price later. Such a retention occured quite frequently in the past. The size of more than 30% is however unexpected large. See the following graph concerning retention via Buba:

    http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2011/10/BUBA%20Retention%201.jpg

17. Dear JKH (at 2011/11/25 at 7:48)

    Yes it is different but the point is that they were deliberately manipulating the allotments to ensure the bids remained just above par to hold down yields on the primary issue. They will have to sell much of it in the secondary markets and then unless the ECB does buy a significant tranche of it the yields will rise.

    The weakness that the auction demonstrated was the lack of bids at the price they wanted.

    Further, Warren’s pithy description is applicable only to fully sovereign governments not to governments that use foreign currencies such as Germany. Ultimately, they could (I don’t suspect they will) find themselves not having (enough) money to fund their operations.

    best wishes
    bill

18. Dear Dr Oliver Strebel (at 2011/11/25 at 7:58)

    I realise it was not “bought” by the BUBA which is why I put it in inverted commas to make that clear. I understand how the German system operates and that it is normal for them to not allot the full tender. But one cannot escape from the facts:

    1. The total bids (in millions of euros) were well below the auction volume desired.

    2. The DF rejected some of the bids to manage the yield.

    3. The amount retained for secondary market operations was historically high and well beyond anything like what they would need for normal market smoothing.

    Once they release that retained allotment the yields will rise unless the ECB buys up the paper and then funds the deficit.

    It was not a normal auction outcome. That is the point.

    best wishes
    bill

19. Bill,

    I agree with your points.

    My connection to Warren’s characterization of fully sovereign governments was in part an attempt at subtlety as regards current European circumstances. The way things stand now, I would say that Germany has the political potential for effective monetary sovereignty over the ECB (as it operates in Euros) almost as much as the US Congress has over the Fed. Germany is really the critical actor now standing in the way of a full ECB backstop for the Euro and its various sovereign clients at this point. If Germany accedes, then the ECB will be able to provide the type of direct assurance to Euro markets that the Fed is implicitly understood to provide to the US by virtue of the more direct form of US sovereignty over it. So in that sense, if Germany accedes to the idea of a more comprehensive ECB backstop, they will in a way have seen the memo by then.

20. Germany wants it both ways — they want an “auction” where the market sets the price. But they also want to manage the price by cutting the auction off at whatever point the yield goes too high. Fine. But that’s hardly what you can call a free market.

21. http://www.counterpunch.org/2011/11/24/the-roads-to-war-and-economic-collapse/

    November 23, 2011: The day before the Thanksgiving holiday brought three extraordinary news items. One was the report on the Republican presidential campaign debate. One was the Russian President’s statement about his country’s response to Washington’s missile bases surrounding his country. And one was the failure of a German government bond auction.

    As the presstitute media will not inform us of what any of this means, let me try…

    Why would Germany, the only member of the EU with financial rectitude, not be able to sell 35 per cent of its offerings of 10-year bonds? Germany has no debt problems, and its economy is expected by EU and US authorities to bear the lion’s share of the bailout of the EU member countries that do lack financial rectitude.

    I suspect that the answer to this question is that the failure of the German government’s bond auction was orchestrated by the US, by EU authorities, especially the European Central Bank, and private banks in order to punish Germany for obstructing the purchase of EU member countries’ sovereign debt by the European Central Bank.

    The German government has been trying to defend the terms on which Germany gave up control over its own currency and joined the EU. By insisting on the legality of the agreements, Germany has been standing in the way of the ECB behaving like the US Federal Reserve and monetizing the debt of member governments.

    From the beginning the EU was a conspiracy against Germany. If Germany remains in the EU, Germany will be destroyed. It will lose its political and economic sovereignty, and its economy will be bled in behalf of the fiscally irresponsible members of the EU.

    If Greeks will not submit to the tyranny, why should Germans?

22. I wasn’t sure where to post this set of questions and ruminations so I have posted them on the latest topic. I hope it is not inappropriate here.

    MMT in General

    I am in a position where my thoughts are perhaps halfway between MMT and Keynesian economics. I find MMT a breath of fresh air as I have become enormously frustrated with the refusal or inability of current conventional (neoliberal and really non-Keynesian) economics to tackle our most pressing economic problems. These most pressing problems are unemployment, capacity under-utilisation, stagnation of wages, excess profits to the capitalist class, excess speculation and asset price bubbles to name the main culprits. I find particularly infuriating (there is no other word for it) the refusal, by the mainstream, to countenance and implement persisting government deficit spending at least until full capacity utilisation is achieved.

    However, I have some problems with MMT where I feel it goes “too far” in some of its claims. Perhaps this is just caused by limitations in my understanding. I hope I can question some of the claims of MMT here in order to get answers and learn. My yardstick for acceptance of economic ideas is that each idea must accord so far as I can tell with the empirical reality of a modern fiat currency system and the real economy system insofar as I understand those systems. I will nominate two key descriptive MMT claims I have found (and which may or may not be genuinely representative of MMT thought) and then add my own commentary. The way some MMT advocates word their claims can perhaps lay them open to scepticism. Therefore I will not sanitise the common and I think representative wordings of their claims. Rather, I will include discussion of this in my commentary. Remember, I make my comments in an enquiring spirit, not to gratuitously slight MMT or its advocates. In my attempts to nut things out on my own without much book learning in economics I might get a little “faux philosophical” so please bear with me.

    MMT Descriptive Claim 1

    Tax is levied by the government in order to create demand for its fiat currency. In addition, it controls aggregate demand or effectively, the money supply.

    Commentary on 1

    The first sentence of this description implies conscious design intent and consensus about such conscious design among “those” (a vague and difficult to define group dispersed geographically and temporally) with the presumed power to implement, maintain and amend such a system over time. Such a statement takes no cognizance of the characteristics of socially evolved systems among which we might count the possibility that a system ostensibly developed for one purpose in one age may evolve and even transform complexly and emergently to meet an old purpose in a new way or new purposes in new ways. The ongoing controversy about the full purpose of taxation and the fact that MMT is a minority view is evidence enough in itself that no such conscious design intent is a matter of general consensus or acceptance. This in itself does not debunk the MMT descriptive assertion but suggests if it is true it might not be complete and that the asserted “purpose” or effective result might not be the one most immediately apparent to most general observers.

    As such, it should have been worded more cautiously as follows. “Tax levied by a fiat currency issuing government functions domestically to create demand for its fiat currency at least for the purpose of extinguishing tax liabilities. This does not exhaust the functions of tax. Another function is to control aggregate demand or effectively, the money supply.” Orthodox (neoliberal) economists might not wave both of these assertions through the checkpoint but I suspect that most would wave the second one through. However, I am sure all would then raise the issue that the most important (to their minds) purpose of taxation is not even a passenger in the MMT vehicle. This purpose is to fund government activity.

    MMT advocates prefer to see the issue with a different causal order. They prefer to see government as creating the fiat currency for government expenditure in total at the beginning of the budget cycle and to see taxed monies as extinguished at the end of the government cycle. To me this seems a rhetorical device on the part of MMT. It is of benefit to see it this way if you are advocating some unfunded deficit spending. It helps break the orthodox dogma that even modest deficits must always be “funded” eventually over many cycles. However, the claim that taxation does not support the bulk of government activity (as acquisition of goods and services from the private sector) does not survive an empirical examination in my opinion (so far as my opinions are developed to date).

    As a wage or other income earner, I might receive 100 units of income over the year. The government might levy 30 units of tax from me. This reduces my monies available for personal expenditure to 70 units a year. This frees up 30 units worth of goods that the government may purchase without adding to aggregate demand. This answers in the affirmative the assertion that aggregate demand has been controlled i.e. effectively kept the same in this case. But it goes further than this. It indicates that a proportion of my productive power, 30%, (as currently valued by the market economy) has been levied or appropriated from me and applied to a government purpose. The real goods (or services) can be and are appropriated too. A new second motor vehicle which I might have indulged in for purely selfish recreational purposes can now be a government vehicle serving a genuine and good public purpose.

    I see no reason that all three of these functions for tax and possibly even more cannot be concurrently true. “Tax supports the bulk of government activity as acquisitions of goods and services from the private sector. As a corollary of its manner of implementation, tax functions to control aggregate demand or effectively, the money supply. Further, tax levied by a fiat currency issuing government functions domestically to create demand for its fiat currency at least for the purpose of extinguishing tax liabilities. This requirement lends such credence, desirability and implied security to a fiat currency in an advanced economy that a specific mandate and enforcement of the status and use of legal tender in the domestic market is not strictly required (and not actually provided for by Australian law). This does not exhaust the practical impacts and functions of taxes in our system. For example, there is the issue of Pigovian taxes.”

    MMT Descriptive Claim 2

    Money must be created before government bond auctions can occur and before taxes can be enforced. Otherwise, there is no currency in the system to tax and no money to raise via bond auctions. This is just basic logic in terms of the way the current system works. It can be no other way.

    Commentary on 2

    Descriptive Claim 2 might be acceptable if the statement is meant in a very pure, simplified theory sense, particularly if hypothetically envisaging the start-up of a new sovereign fiat currency issuing government from scratch. This is the type of example often used by some MMT advocates. However, in the real world, at any point in time, the pre-existence of money and the historical pre-existence of other systems of money (prior to the post gold standard “fiat currency era”) and the consequent carry over and evolution of said money, tax and other financial systems in the pre and post gold standard eras vastly complicates the picture. Much current extant money is certainly pre-existent to the current budget cycle. Much current extant money (in an era of high lending) is not fiat money but bank loaned debt money which is not yet extinguished against the debt by repayment.

    It seems to me that I could go to the (private enterprise) bank and borrow against the equity in my home to pay taxes I might be having trouble paying. These are ledger or account entries, nothing more. My home loan ledger now shows say 10,000 more debt. My savings account temporarily shows 10,000 more credit then reverts to its previous level (very low). My debt to the tax office is expunged. Technically, so far as I can see, the government at the slice of time in question created no more fiat money for me to pay my tax liability. Thus I did not strictly pay fiat money to extinguish the tax debt at that slice in time. I paid bank generated debt money. It is true that this debt money will eventually be expunged by repayment of the debt or the bank writing it off against other assets (probably my repossessed house) if I fail to repay.

    The “persistence” of monies (how long particular monies “persist or exist”) seems to be a tricky question and one that might need answering. I was tempted to say that fiat money, once created persists indefinitely and debt money once created persists only until the debt is repaid. However, it occurs to me that MMT might state formally, in the case of balanced budgets, that all fiat monies persist for one year (the budget cycle) whereupon they are destroyed by taxation and fiat monies are created anew. It seems to me that there is a mathematical equivalence leading to a logical equivalence for the views that (a) fiat monies are created and destroyed in equal proportions by balanced budget cycles or (b) fiat monies taken in tax in balanced budgets are recycled indefinitely while balanced budget cycles subsist.

    Thus, formally speaking, in balanced budgets we can equally regard fiat monies as having a precise life of one year or an indefinite life. At least, I think this might be the case. With debt monies, the only way to look at debt monies must be to consider that they have a half-life (the period of time it takes for the amount undergoing “decay” to decrease by half). Already extant debt monies decay. It is not possible to set a firm end date for many loans as repayment rates can be varied and re-borrowing (to some extent) can occur. The behaviour of many monies from numerous loans, many with a functionally indeterminate termination or full repayment date, all taken out at many different times would be thus be very complex indeed but one assumes this would be be amenabe to an aggregation solution by probability mathematics and (differential?) equations. (I am no mathematician.)

    I am honestly not sure where (if anywhere) my above ruminations lead. The first thing they suggest to me is that governments (under current laws, regulations, practice and ideological management) have far less control of how much debt money is in the system and whether it is growing or decaying than they have of fiat money. Fiat money is under tight control (arguably too tight) constricting government action and popular demand by the many (the 99%) who have votes to vote with but not much money (comparatively) to “vote” with. (I think you get my drift). But debt money is under loose control or out of control. I can only sum that up by asking, “Is this any way to run an economy?”

    Do my ruminations and reservations about MMT suggest any replies?

23. @Ikonoclast:

    The first point talks about how taxation creates demand for the currency, but implied (and often stated) is that state power is at the core of this demand creation. If there was no penalty for not paying taxes, then it would not work. So the concept of a currency having value because it is simply declared “legal tender” and must be accepted for all debts private and public – that’s state power once again. So really, state currency has value because the state has a court system and cops to back it up.

    Check out https://billmitchell.org/blog/?p=5762 and the first answer to this saturday quiz:
    https://billmitchell.org/blog/?p=16581
    Bill talks about how taxation moves resources from the private to public domain, just like in your car example.

    When it comes to the difference between fiat and bank created currency, the key idea is “net financial assets”. Here’s a blog that touches on this: https://billmitchell.org/blog/?p=11218. The basic idea is that banks cannot create NFA, only deficit spending can. Since not all money passes through the government in a year, it is impossible to say that fiat money only lasts a year. It’s best not to get bogged down in how long a dollar lasts – MMT is a macroeconomic framework, and concerns itself with all the money in aggregate.

    As for pre-existing currency, that is an interesting question. I’ve never heard Bill discuss it, but here is an essay from 1913 about the topic:
    http://www.ces.org.za/docs/what%20is%20money.htm

24. Bill,

    Great work yet again. This site and Pragcap are the only two I read for my regular MMT dose of reality.

    I have one question (which I will open to all other reader)…..

    I have come to believe government deficits, which spend money into existence, essentially represents private sector equity, which in turns helps the private sector (banks) to create credit money without causing financial instability (although does not guarantee it).

    Does this mean the Euro system does not have any “private sector equity”. And all Euro money is essentially credit money?

    I hope this question makes sense.

25. @Ikonoclast

    Re: paying taxes with bank money. The bank actually pays your taxes with fiat money, on your behalf. If you borrowed money to pay your taxes, you are left with a liability to the bank, rather than to the government, and the bank’s reserve account at the central bank is reduced as your tax payment is processed, while the bank gains an offsetting asset (your promise to repay the bank).

    So tax payments are ultimately settled in fiat money, despite the appearance of you having used bank money to pay taxes.

26. ParadigmShift, thank you, you definitely seem to be right. Once I think it over and find no holes I will be sure you are right. I appreciate your answer and Grigory’s answer which have both cleared some of my misunderstandings.

27. JKH,

    Right.

    The German government may have €250-300 billion in domestic assets (deposits with private banks) and foreign assets combined as per data available. That was its backstop – leading it to reject record bids.

28. this post is great Bill. Thank you! So helpful and informative.

29. @Bill and Point 1 to 3: I completely agree.

    Best wishes!

30. Ramanan,

    Excellent data digging by yourself on that, which I saw afterwords. Confirmed what I thought must be the case.

31. JKH,

    Thanks. Also, I believe even other governments in the Euro Area do that.

    So one hears of the Spanish government alloted bids less than the maximum amount mentioned prior to the auction. The German auction simply got some attention due to the language it used and some minor differences with others.

    If the Spain (government) were to do it, i.e., raise only €3 billion in an auction instead of the declared maximum €5 billion, it would tell Bloomberg and Reuters (among others) that the issue with ISIN x is sized €3 billion. The German government seems to do something different – even if it raises €3b, it will say that the size is €5b, and that €2b was retained and later try to sell the €2b directly in the secondary markets. But, at no point in time is the €2b in the Bundesbank’s balance sheet. Spain, on the other hand will issue securities with new ISINs for the €2b or merge it with another issuance.

32. Ramanan,

    Paper via Krugman on Ireland’s external position. Might be of interest:

    http://www.philiplane.org/SSISI2011LANE.pdf

33. JKH,

    Thanks. Saw the presentation earlier but not the paper.

34. Perhaps the tender volume was made deliberately larger than what would be needed from the Primary Market ? Can there be any explanation besides an regretful breaking of the rules ?

35. The gyration of the Germans are hilarious. How can they expect to hide their silly attempts at manipulating perception?