I am still catching up after being away in the UK last week. I will…
Continuous and larger budget deficits are required
There is a popular segment (that is, I assume it to be popular) on the national ABC television news in Australia each night. the Finance Report presents one or more graphs which motivate the presenters so-called insights into what is going on in the Australian economy. I rarely see it and when I do I tend to ignore it because the presenter is infuriating to say the least. But last night, he presented to charts which were of interest although the conclusions he drew left the “elephant” that was standing in the room unnoticed. The conclusions he drew were facile and he ignored the most obvious conclusion – that the Australian economy could only maintain growth into the future if the budget deficit was larger and on-going. That would have been a bridge too far for him to cross but that is what his data and all the other related data that he didn’t present tells us. Us – in this context – being those who understand how the macroeconomy works. So today’s blog is a reprise of the graphs (or my versions of them) with the essential commentary that might have been presented last evening and would have helped the viewers appreciate the current economic situation more fully and understand why deficits are essential in these situations.
The first graph he presented was the Household saving ratio. The following graph is taken from the June-quarter National Accounts data. It shows the Household saving as a percentage of disposable income from the March-quarter 1960 to the June-quarter 2013 with the red horizontal lines being the relevant averages for the particular periods.
The point he made is one that I have made often. Prior to the credit-binge which started gathering pace in the mid-1980s as the neo-liberals began deregulating the financial system, the household saving ratio was averaging around 16 per cent (1959:3 to 1985:3).
Then it started plunging and was negative in the December-quarter 2005 and the March-quarter 2006 at the height of the borrowing frenzy.
With the onset of the crisis, households quickly started reverting back to prior behaviour and the saving ratio shot up to 10 per cent.
That seems to be the new attraction level, which is still well below the earlier behaviour. I speculate that the motivation to save is strong now but the capacity is reduced because of the interest servicing burdens resulting from the record levels of debt the household sector is now carrying as a hangover of the binge (see later).
It is important to understand this behaviour in the context of what the other sectors (external and government) and sub-sectors (capital formation by firms) have also been doing.
The next graph (also taken from National Accounts data) adds private business investment ratio (% of GDP) from first-quarter 1960 to the December-quarter 2012 to the household saving ratio for the same period.
The data is related to (but not an exact depiction of) the private domestic sector balance. Note the vertical axis is a percentage but the denominator in each case is different – being disposable income in the case of household saving and nominal GDP in the case of the investment ratio.
Obviously, if we expressed the saving ratio in terms of total nominal GDP it would be somewhat below the blue line. But we will come back to the sectoral balance (saving minus investment) later.
It is clear that up to the mid-1980s (and during the full employment era which ended in the late 1970s), there were no sharp deviations between the household savings ratio and the private business investment ratio other than during the 1974-75 recession.
The two series become divergent in the mid-1980s, as the then Labor government started pursuing its neo-liberal reforms of the financial system and squeezed the capacity of trade unions to ensure that real wages kept pace with productivity growth.
As a result, consumption spending became increasingly reliant on credit growth as the financial services industry started to grow quickly. Just before the crisis, Australian households have built up record levels of debt and realised their position was becoming precarious and unsustainable.
The onset of the crisis accelerated that sentiment and the household saving ratio started to rise and move back towards the investment ratio.
The point is that the neo-liberal period leading up to the crisis was atypical in behavioural terms.
The government was only able to run surpluses during this period because credit-fuelled consumption growth was able to maintain the tax revenue growth.
In addition, the investment ratio started to rise as a result of the record commodity prices (and terms of trade) which drove the mining boom investment as the consumption binge started to slow.
That abnormal divergence between the household saving ratio and the investment ratio was clearly unsustainable and with the current account behaving more or less as usual (deficit of around 3-4 per cent), the federal government had to move back into deficit to keep the economy growing on trend, irrespective of whether the global financial crisis occurred or not.
Another way of looking at these trends is to consider per capita consumption growth, which was the second graph that was produced on last night’s ABC Finance Report. The graph (you can view it HERE) was dated from 1988 to 2013 and was sourced to an investment bank.
It is unclear what data they were using but if we use the official ABS National Accounts data for household consumption and the ABS Resident population estimates then the following graph is produced.
I have used a longer dataset because it tells an even more interesting story to the one presented on the Finance Report (the extra elements would be inconvenient for the presenter’s usual message that deficits are too high). I have used resident population estimates from June 1971 to generate the annual per capita growth in household consumption.
While the behaviour of the series is similar to the TV graph over the same sample there is a noticeable different during the global financial crisis.
The TV presenter said “We’re Not Consuming Enough”. I would say that we have reduced our consumption growth relative to the growth in the population from the unsustainable levels prior to the crisis to adjust to the realities of too much debt, a widening gap between productivity growth and real wages growth, and rising unemployment.
The last point is important. My graph actually suggests four distinct periods. The first period up to late 1970s saw rapid annual growth in per capita household consumption.
The full employment era was still struggling to survive, real wages growth was in line with productivity growth which meant that robust consumption growth could be maintained without recourse to ever-increasing debt levels and household debt was low.
The attack on the trade unions began in earn in the early 1980s and throughout the 1980s the real wage was cut as productivity growth continued. The growth in per capita household consumption fell to a new level.
The 1991 recession – our deepest since the Great Depression – saw a new drop in the growth in per capita household consumption. The problem was that this period was marked by a continued divergence between real wages and productivity growth and the beginning of the escalation in household debt as all those friendly financial planners sought any means to ram debt down the throat of anyone who could sign a document – and others who couldn’t (no doc loans!)
After the latest crisis, the growth rate has fallen again (the point made by the TV presenter) and unless there is a dramatic shift in the distribution of national income back to wages (by allow real wages to grow in proportion to labour productivity – with a catchup for the redistributions that have been going on since the mid-1980s) and significant declines in unemployment and underemployment, what is happening now is the new norm.
The RBA dataset – Household Finances – Selected Ratios – B21 – tells us what has been happening with household debt burdens.
The following graphs provide further information as to why consumption growth is lower and why the household saving ratio has risen but is still below its pre-1980s levels.
The first graph shows total household debt as a percentage of disposable income since 1980 (to March-quarter 2013). The blue line is total and the red housing mortgage debt.
Conclusion: the balance sheets of the households holding this debt are now very precarious with rising unemployment and falling economic growth.
The next graph shows the related interest payment burden (as a percentage of disposable income) over the same period. You can see that even though the lower interest rates are bringing some relief at present, the nominal burden is still high due to the massive debt burdens.
The amount of discretionary income for households holding mortgages is, on average, now severely squeezed and that will work against any resumption in strong consumption spending growth.
You can see that as the crisis hit the RBA dropped interest rates quickly fearing a financial collapse. But then the inflation bogey entered – the fear not the actuality – and they prematurely started to tighten again at the same time as the government was beginning its obsessive (failed) pursuit of a budget surplus.
The combination of policy changes stifled economic growth well before it had recovered to trend and drove up the debt burden for households again.
The following Table breaks down the sectoral balances into five-year periods from the March-quarter 1960 to the June-quarter 2013 (the last period being from 2010-13).
Please read my blog – Answer to Question 1 – for the derivation and meaning of these balances if you are unsure. Remember they are derived from the National Accounts and (S – I) – (G – T) – (X – M) = 0.
In the full employment era spanning 1960 to the mid-1970s the budget deficit was continuous and stable and this provided the aggregate demand stimulus to offset the small drain in spending arising from the small external deficits.
The private domestic sector balance (saving minus investment) was in a small deficit as nation building continued but there was strong saving (as a result of strong real GDP growth) supporting strong investment (and building of productive capacity).
The situation started changing in the 1980s with deficits declining (and occasional surpluses recorded) as the neo-liberal anti-deficit mantra gathered pace. The external deficit rose on average and the private sector balance went into higher deficits as the saving ratio fell.
With the external deficit stable between 1985 and 2005 the shift to budget surplus was only possible because the private sector went further into debt.
Since the crisis, the private sector has radically altered its behaviour returning more to the behaviour of the 19060s (but constrained by higher debt levels) and growth is being supported by the return to budget deficits.
The fact that the growth rate is well below trend and unemployment is rising again tells me that with this private sector behaviour the deficit has to be higher.
That is the major message of all these graphs.
The point is that the period before the neo-liberal era was characterised by several features.
1. Relatively continuous use of fiscal deficits.
2. Stable household saving ratio of around 16 per cent of disposable income.
3. Real wages growing in line with labour productivity – so that consumption could be driven by real wages growth rather than credit.
The neo-liberal period is in fact the outlier – an atypical period. Which makes the claims by those who hold out that governments should return to surplus as a demonstration of fiscal responsibility rather difficult to understand.
In many cases, where actual budget surpluses were recorded, the economies went into recession soon after. The important point though is that the surpluses were made possible by the unsustainable growth in private credit which drove private spending and boosted tax revenue.
It is clear that we have returned to a more normal environment now where the private sector are attempting to save more out of disposable income and reduce its reliance on credit.
Two implications arise if that if the private consumption growth is returning to more normal (lower) levels then two things follow:
1. The government will more likely have to run budget deficits of some magnitude indefinitely – as in the past.
2. Real wages growth will have to be more closely aligned with productivity growth to break the reliance on credit growth.
And when the nature of the balance sheet adjustments that are going on at present are included in the assessment these two points become amplified.
This also makes the quest for fiscal austerity to be mindless and very destructive. Where will growth ever come from if consumers are returning to higher saving ratios, firms are very cautious, all countries are eroding each other’s export markets, and governments are adding tot he malaise?
Conclusion
That message was missing from the TV presentation. It was the most obvious conclusion to be drawn from the data presented.
I outlined the conceptual material to support the conclusion of this blog in these earlier blogs – Government deficits are the norm and Budget deficits are part of “new” normal private sector behaviour.
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.
Dear Bill
Australia has been running current account deficits despite high commodity prices. If those prices fall, this deficit may rise further. In that case, the government has to run still larger deficits, unless the private sector goes into debt because of job losses in the primary sector due to the fall in commodity prices.
A fall in commodity prices is being predicted because of the expectation that China’s growth will slow down. I don’t get it frankly, slower growth is still growth. If China’s rate of growth will fall from 11% to 5% per year, then it will still will be growing faster than most countries and its demand for raw materials and energy will still continue to rise, although at a slower pace.
Regards. James
Hi Bill,
We’ve been doing some thinking (uh-oh!) along this same line over here in the US over the last week and in a conversation the question came up:
“Again, let’s bring this back to a practical question. Suppose some progressive-leaning economists like Sanders, Brown and Warren come to the MMT folks and say, “We want to propose a budget that incorporates the insights of MMT and aims at reducing unemployment from 7% to 5% within one year. How big does the deficit have to be?”
Some of us had a hard time answering this as of course “the deficit” ex post results depend so much on non-govt savings desires manifested during the prior period in question which of course we cant predict.
So all we could come up with was “this is the wrong question to ask…” type of answer which seemed to disappoint the questioner who was really focused on “the deficit” per se… like it was something which could be targeted ex ante.
Any advice with how to proceed if we are asked to come up with a “deficit target” in a budget ex ante which will “result” in a certain employment goal?
Our “wrong question” answer was interpreted as a “cop out” to an extent imo… rsp,
Dear Matt Franko (at 2013/09/26 at 21:31)
Hope you have that sectoral balance poster on hand whenever you are confronted with questions such as this!
But you are correct, the endogeneity of the fiscal balance makes it a non-question. The real questions are:
1. What is the output gap? This is an assessment of how far from the inflation barrier the nation is.
2. How many jobs have to be created to accomplish your target reduction in the UR? This should include estimates of the supply-side response (increase in participation) once employment growth increases.
3. What is a reasonable estimate of labour productivity as applied to the target group? This is to generate an estimate of the increase in real GDP required.
4. What is the reasonable estimate of the spending multiplier? To assess the magnitude of the initial injection.
5. Then, given 1-4, what is the injection in net government spending that is required?
That is the sequence. Of-course, you can do the work for them up to 5 and then the answer is obvious.
But they should understand the difference between the initial change in the deficit to get the economy rolling again and the final change. The endogenous response can be estimated in a relative straightforward way as well.
That is all in a non-Job Guarantee world. In a JG world the stimulus required is generated by how many workers come out for a job.
However, in closing, I would urge you to re-educate the audiences into realising that the deficit is irrelevant and they should be talking about the extra spending and jobs that are required. The deficit will be whatever it is – a win-win – the nation reduces unemployment and at the same time rids itself of a major neurosis (worrying about irrelevant sets of numbers).
take care
bill
Hi Bill,
I need some help!
GDP = C + I + G + (X – M)
Does G normally include government interest payments?
@Matt Franko ~ You can forget asking Sanders anything. He has been approached by top MMT people already, and has been openly hostile towards them. He is COMPLETELY sold on the idea that the deficit MUST be brought down, and refuses to consider any ideas that say this might not be the case. Sanders may talk socialism, but his economics is monetarism all the way through.
Philippe asked: “Does G normally include government interest payments?”
As I understand it, the interest paid on federal government debt is a budgeted item, and therefore must be regarded as government spending. However it should not be inferred from this (as many people do) that the interest on public debt is paid by the taxpayer. It is more appropriate to think of it as comprising a small component of the money received by government when it issues Treasury securities to the private sector. A sovereign government has an unlimited ability to issue such securities, and therefore an unlimited ability to pay interest on all of its public debt, in perpetuity.
Agree with John Hermann that yes, whatever securities the government issues it can, as the currency issuer always pay those interest rates. The other fact is that these interest rate payments are more like a banking situation where the government pays you a fixed sum to hold money and really have no relation to the actual issuing of currency itself.
I think one of the ways to think about the deficit is that it is essentially the government providing the liquidity that is needed for the economy to function at a certain level, and that yes, the government really does generally need to run deficits fo provide liquidity for growth — if you’re running a surplus you’re taking more liquidity out of the economy than putting in, and yes, slowing growth.
The other issue other issue which is a Bill notes, is that what liquidity is being put into the economy has become captured more and more by the upper end of the economic spectrum ie. noted as the rising inequality and increasing wealth at th top. Which was for a time replaced with liquidity as household debt which has now run a ground. So the other part of the equation is changing the structure so that liquidity in the economy is more evenly distrubuted so that you get back to where households are saving more, and have more disposable income to save. And this is where taxation and government spending policies come in — that the liquidity the government is pumping into the economy is not captured by only part of it, but spread evenly through the economy providing the most benefit for all.
I agree with Keith’s overall analysis. When a sovereign government engages in deficit spending the net effect is to add securities to the assets held by the private sector, however only the issue of short-term securities may be thought of as adding liquidity.
Also, I would point out that there are other ways of redistributing wealth and income more evenly through the economy, other than by progressive taxation or targeted government spending. One such way is to issue a national dividend, which could take the form of money credited to the transaction accounts of ordinary citizens. This would be carried out by the central bank on a regular basis according to specific legislated guidelines. The government would not be directly involved. As for the financial mechanics, one proposal is for monetary policy to be operated in such a way that the central bank could sell bonds to, but not buy bonds from, the private sector. The central bank would only be able to buy bonds from Treasury directly, and the money would be placed in a special account accessible only to the central bank, and could only be used for funding a national dividend. The amount delivered into citizens’ accounts every month (as a sort of interest payment) would vary according to the monetary policy requirements.
John Herman
absolutely agree the central bank can bridge the spending gap by adding to household accounts
but it is crazy to set up unnecessary structures to “account for the money”
the argument to win is that the state has spending power as the monopoly issuer
of state currency.
the elimination of bond issues will transform the political and economic
argument .whether its targeted government spending ,progressive taxation or national dividends.
“One such way is to issue a national dividend, which could take the form of money credited to the transaction accounts of ordinary citizens. ”
That can’t really work outside of a computer simulation.
Unfortunately you have to deal with real human beings, and real human beings don’t like other people being given something for nothing if they don’t believe the others deserve it. And that causes them to alter their behaviour – both in terms of withdrawing output and politically agitating to have the payment withdrawn from those that they believe are undeserving.
Human resentment destroys or degrades all state payments that are seen as freebies.
If you are retaining a capitalist production and distribution system, then you have to work within the constraints and fundamental assumptions of that system. Otherwise that system will stop producing what it produces. ‘Working’ is central to the system.
Hi Bill,
Thanks for you answer here… your 5 steps there make a great top level plan for our policymakers to follow.
And good point of course a JG largely negates the whole thing. rsp,
Neil Wilson,
I’m sure people already feel this way about the abysmal unemployment “benefits” given to those who cannot find work (a small percentage of them may not WANT to work, but even that’s not enough to condemn a human being to poverty – hell, I know a lot of lawyers and bankers and marketers and executives and politicians and lobbyists and financial planners and salesmen and insurance assessors ad nauseum that bring far more destruction of true wealth, progress, prosperity and abundance than any self admitted “dole bludgers” ever do, and the former are rewarded for their vile and/or selfish economic behavior! Why the populace refuses to see this blatant reality escapes me. Perhaps it is fear of sudden and tremendous changes that would need to occur if people took their fingers out of their ears, heads out if the sand and eyes away from the tv?
Prof Mitchell,
I believe the five step process outlined above (reply to Matt Franko) is a very useful example. As a layman, I find it a bit tricky to come up with the reasonable estimates required. Has this been worked out and published somewhere? A worked out example, particularly for the US, with some supporting data would be very interesting.
Best Regards,
Will Kanaley
One such way is to issue a national dividend, which could take the form of money credited to the transaction accounts of ordinary citizens.
Neil said: “That can’t really work outside of a computer simulation. Unfortunately you have to deal with real human beings, and real human beings don’t like other people being given something for nothing if they don’t believe the others deserve it. … ”
It works in practice already Neil. Money given to bank depositors “for nothing” is also known as interest.
The proposal I have been discussing is for all transaction accounts to receive this dividend, so no depositor would be at a disadvantage relative to any other depositor.
“It works in practice already Neil. Money given to bank depositors “for nothing” is also known as interest.”
Interest to real live depositors comes from the bank earnings on loans, and is perceived as such.
Payments from a central bank – particularly if out of kilter with the ‘contribution’ in terms of money in the bank will likely be perceived as unfair.
You can’t compare the two situations. It’s a pipedream.
Neil Wilson,
“Payments… will likely be perceived as unfair.”
And this is the crux of trying to accomplish ANY worthwhile goal in our current economic reality. I can’t think of a single person who does not have an overinflated sense of worth. “It’s the old “I have done x so I deserve y but you haven’t had my life’s challenges so you don’t deserve as much as me”.
If we decide to do nothing that will be seen as unfair by anyone with any kind of private property or considerable liquidity, then we will essentially be deciding to do absolutely nothing at all.
“Let them starve!”
“If we decide to do nothing that will be seen as unfair by anyone”
Nobody said that and it is a logical fallacy to argue an excluded middle.
But the simple fact of the matter is that if sufficient are persuaded that something is unfair then it will not be created in the first place, and/or will be undermined if it is in place by the political process – unless you are planning on running a fascist dictatorship.
We have seen that happen with unemployment benefits and the implicit understanding that the public sector would hire those unable to get a private sector job. We have seen it with disability provision. And we are starting to see it with state retirement pensions.
Humans are unusual animals in that they will share with others the spoils of effort, but that has limits in our base programming. That limit appears to be that others have to be perceived as pulling sufficiently on the same rope.
You have to work with what you’ve got and engineer a solution that is feasible in the real world.
how can a national dividend given to everyone be seen to be unfair?
“how can a national dividend given to everyone be seen to be unfair?”
Because I work 40 hours a week and now have to pay higher taxes on my salary to fund your indolent lifestyle and I hate you for it.
And therefore I’ll vote for the guy that’s going to force you to earn your keep.
I work 40 hours a week and now have to pay higher taxes on my salary to give money to millionaires and I hate them for it.
And therefore I’ll vote for the guy that’s going to introduce means testing for ‘rich people’.
Counter-intuitive accounting logic has no explanatory power against that sort of base emotion – particularly at the lower end of society where the logical reasoning capability isn’t as good anyway.
” Interest to real live depositors comes from the bank earnings on loans, and is perceived as such. ”
The word “earnings” simply refers to a percentage charge applied to loans, which is largely unrelated to the cost of servicing those loans, and in the case of retail loans advanced by commercial banks is always much larger than the real rate of growth of the economy at large. Money “earned” by both commercial banks from their retail loans and by depositors is largely unearned income, and therefore may be regarded as “money for nothing”.
Kevin said: “how can a national dividend given to everyone be seen to be unfair?”
Neil said: “Because I work 40 hours a week and now have to pay higher taxes on my salary to fund your indolent lifestyle and I hate you for it.”
The fallacy in this statement is simple and obvious. A national dividend is not paid from taxes.
And in more general terms, the government has no direct involvement in issuing a national dividend.
It is paid by the central bank, under carefully defined guidelines.
As I have indicated previously, one possible mechanism for effecting such payments would involve setting up an alternative way of operating monetary policy. There are other possibilities, which I won’t discuss here.
“The fallacy in this statement is simple and obvious. A national dividend is not paid from taxes.
And in more general terms, the government has no direct involvement in issuing a national dividend.
It is paid by the central bank, under carefully defined guidelines.”
Oh dear.
(i) The central bank *is* the government. Pretending otherwise is the fallacy – as well as anti-democratic in the extreme. You may as well have the King handing out Gold. Autocratic structures are unacceptable.
(ii) Your average Joe Punter can’t do accounting and is very clearly persuaded by the argument that they are getting less so that somebody can have more. And that continues unless the other is clearly seen as ‘earning’ their income. The political agitation of the last 50 years shows what happens when that gets political traction – means tested child benefit, increased retirement age, longer working hours, poverty unemployment benefit and no public job provision.
(iii) If any money paid out is big enough to have any impact then it *will* have to be withdrawn via higher taxes or you will overcook the productive capacity of the economy.
When will so called progressives get their heads out of the clouds and start working on how to get a practical implementation in place in the real world that ordinary fallible, hard of accounting people will accept?
Neil,
something I haven’t seen bill mention much (if at all) here is the fast approaching reality of the Luddite fallacy finally having the effects that people feared 200-odd years ago. Automation in an extreme way is only just around the corner (probably going to explode into reality around the same time that horrendously cheap human labor is no longer accepted in any nation by the global public. This isn’t a problem we’ve REALLY had to tackle before but we’re already full to bursting with “bullshit jobs” and we’re backing ourselves into something of a corner.
shorter working weeks have their obvious impracticalities and as you say, nobody wants to sacrifice something they feel they’ve earned so it can be given to an ingrate who has done absolutely nothing to “better themselves”. It’s a new problem and it will involve new thinking. Progressives might have their heads in the clouds but conservatives have their heads in the sand and refuse to admit that the age we’re entering hasn’t really been planned for and can’t be solved using antiquated methodology.
What it all boils down to is that decades of productive capitalism and the government steering if such has worked tremendously well for the overall majority of participants in the most productive nations. Now the macro issue of massive population in conjunction with automation and productivity increase for fewer labour hours and the recognition of inefficient and pointless white collar jobs means that looking to the past is not relevant. What’s going to be the most difficult part of finding a practical solution will be figuring out just whose responsibility it will be to lead us into this unknown future. Call me a cynic but I just DO NOT TRUST conservatives (government or the business interests who use lobbyists to pull the strings) to get us through this mess. My hope is that schoolteachers and students will be the most open minded about it.
the political and economic argument to win for MMT is that taxes do not fund government spending
I would be very happy if my wage which like most others has stagnated for many years was topped up
with a national dividend.
Yes any political and economic advance is difficult and those with the largest private monetary power
will fight evey inch of the way to keep government spending down.
the animal species which we belong to cannot leave the animal behind -utopia is a pipe dream
but for a national dividend to be excepted then people will have to except the reality of government
monetary power eg that taxes do not fund spending that is they would have to except the arguments
of MMT!
ONe thing we do not have to worry about is whether hard working people would not want to except
extra spending power because theor neighbors are getting it to .This is the strength of universal benefits
they undermine the scrounger striver debate.
if it is true that “joe Punter” doesn’t get accounting then MMT remains an insignificant academic curiosity
and a more egalitarian future remains a pipe dream .
Sounds like the brilliance of the guaranteed minimum income 😉
” The central bank *is* the government. Pretending otherwise is the fallacy – as well as anti-democratic in the extreme. You may as well have the King handing out Gold. Autocratic structures are unacceptable. ”
The organs of the state embrace the government, executive, judiciary, and central bank. The central bank is not the government (although hopefully it will be accountable to government) and it has a different charter and set of responsibilities to government. Central bank spending is different to government spending.
” If any money paid out is big enough to have any impact then it *will* have to be withdrawn via higher taxes or you will overcook the productive capacity of the economy. ”
You misunderstood what I said Neil. What you have just said is true of government spending but it is not true of central bank spending. In the exercise of monetary policy, it is clear that new state fiat money injected into the economy by the central bank – when it purchases securities from the private sector – does not need to be withdrawn by any mechanism. And this is necessarily so, because it correlates with the increase over time in the aggregate volumes of both state fiat money (currency plus exchange settlement funds) and bank credit money.
“The central bank is not the government ”
It is. In the UK the central bank is owned 100% by the Treasury and accepts instructions from it. So it is both de facto and de jure part of government. To the point where a consolidated balance sheet is appropriate under international accounting standards.
In the US, the central bank takes instructions from the Treasury and Congress. As Bernanke himself said “we are the agent, of course, of the Treasury and it’s our job to do whatever they tell us to do”
“Central bank spending is different to government spending.”
Central bank spending (if it is spending, not lending) is precisely the same as Treasury spending. It injects NFAs into the non-government sector.
What you buy with it, just determines who has the money to spend and whose wealth is increased via the price maintenance function.
Perhaps time to re-read some of the blogs Bill has written on the operations of the modern monetary system.
” In the US, the central bank takes instructions from the Treasury and Congress. ”
In the U.S., government has control of fiscal policy but not monetary policy. Neither the U.S. Treasury nor the U.S. Congress instruct the Fed. Neither doers the Australian government instruct the Reserve Bank of Australia.
” Central bank spending (if it is spending, not lending) is precisely the same as Treasury spending. It injects NFAs into the non-government sector. ”
No it is not. Central bank spending is quite different from Treasury spending. When a central bank buys securities from the private sector (using state fiat money created out of nothing), the financial wealth of the private sector remains unchanged.
When a government deficit spends, the securities which it creates out of nothing are sold to the private sector, and the financial wealth of the private sector increases.
The term “consolidated government” used by many MMT advocates has nothing to do with the government supposedly instructing the central bank. It has to do with the necessary links between the implementation of fiscal policy and the implementation of monetary policy.
“Neither the U.S. Treasury nor the U.S. Congress instruct the Fed. ”
Bernanke said in testimony to Congress: “we are the agent, of course, of the Treasury and it’s our job to do whatever they tell us to do”
I believe him, not you.
“When a central bank buys securities from the private sector (using state fiat money created out of nothing), the financial wealth of the private sector remains unchanged.”
That’s a collateral upgrade. It is a swap, not spending. And is part of the repo cycle to maintain interest rates on instruments. It is deflationary – like QE due to the income withdrawal.
We were talking on this thread about putting money in people’s transaction accounts as a national dividend.
” Bernanke said in testimony to Congress: “we are the agent, of course, of the Treasury and it’s our job to do whatever they tell us to do” I believe him, not you. ”
You don’t need to believe anyone, just examine the facts. In the U.S. and Australia, the central bank (CB) is unconnected to Treasury and operates semi-autonomously (meaning that members of the central bank board are government appointees and the CB must report annually to the legislature on what it is doing). However in both countries, the government of the day does not interfere in the operation of monetary policy, which is the prerogative of the CB.
It is possible that Treasury possesses some reserve powers, but clearly they are rarely (if ever) used.
” We were talking on this thread about putting money in people’s transaction accounts as a national dividend. ”
Yes we were. And this form of spending is different from Treasury spending.
Incidentally, I suspect the statement you attribute to Bernanke has been taken out of context.
“Incidentally, I suspect the statement you attribute to Bernanke has been taken out of context.”
Obviously – because you believe in a system that is run by autocrats, not democrats, where the actual government is a mere puppet of ‘very, clever people’. Evidence won’t change that belief.
If the central bank ever tried to operate directly counter to the will of the elected chambers, then you would very quickly see who is really in charge.
And that’s because this bank independence thing is all an illusion.
“And this form of spending is different from Treasury spending.”
No it isn’t. It is *exactly* the same. It is no different to a state pension payment, or unemployment benefit.
Read some more MMT, and understand why.
Neil is right of course. In both Australia and the US, the central bank is “independent” but acts as an agency of the government. The government could, if it chose, direct monetary policy as it liked. It’s pure fantasy to imagine the RBA or the Fed are not entirely within the control of the government if it chooses to exercise that control.
“And this form of spending is different from Treasury spending.”
Neil said: ” No it isn’t. It is *exactly* the same. It is no different to a state pension payment, or unemployment benefit. ”
Unlike the other payments that you mentioned, a national dividend does not need to be matched to revenue. And neither does it need to be inflationary in consequence.
“Incidentally, I suspect the statement you attribute to Bernanke has been taken out of context.”
Neil said: “Obviously – because you believe in a system that is run by autocrats, not democrats, where the actual government is a mere puppet of ‘very, clever people’. Evidence won’t change that belief. ”
That is an unwarranted assumption on your part Neil. What may be obvious to you does not necessarily coincide with the truth. My only interest in remarking on this issue is to describe how the system currently works, which does not imply that I support or approve of the way it works. So please do not attempt to play the role of amateur psychologist by asserting that you know what I believe or what motivates me.
The system is not currently run by autocrats (well, not entirely anyway) for a very good reason, which is well understood by postKeynesians and MMTers. And that reason is that the financial system operates endogenously, meaning that the CB operates monetary policy reactively, rather than proactively. In such a system the control of interest rates is the driver and the volume of money is a residual.
The government was never a puppet and never will be a puppet. Irrespective of the level of actual or potential control of the legislature and executive over the central bank and its operations, there has been a long-standing agreement that government will not interfere in the primary operations of the CB, which is chartered to set interest rate targets and operate monetary policy according to the actual needs of the private sector for currency and credit.
I am confident that those who contribute to the discussions on this list are intelligent people.
And Intelligent people do not need to resort to using straw man arguments.
From Wikipedia:
To “attack a straw man” is to create the illusion of having refuted a proposition by replacing it with a superficially similar yet unequivalent proposition (the “straw man”), and to refute it, without ever having actually refuted the original position.
“Unlike the other payments that you mentioned, a national dividend does not need to be matched to revenue.”
Unlike other payments, a national dividend cannot happen because the central bank doesn’t currently have the authority to pay it.
Either you are working within the current framework – in which case you work with the current legislation and customs, or you are not – in which case all bets are off. In particular the idea that Treasury has to match to ‘revenue’.
” Unlike other payments, a national dividend cannot happen because the central bank doesn’t currently have the authority to pay it.”
Neil said: ” Unlike other payments, a national dividend cannot happen because the central bank doesn’t currently have the authority to pay it. ”
Correct. I did not say or imply that a national dividend was possible within the current framework.
I was discussing possibilities for a reformed financial system which go beyond the conventional ways in which newly created money may be distributed within the economy. In particular (but not exclusively) an alternative framework for operating monetary policy, in which the CB can acquire securities from Treasury directly but is not permitted to acquire them from the private sector. The Treasury would continue to issue securities to the private sector and the CB would be permitted to sell securities to the private sector. The money created for the purchase of the securities by the CB would be stored in a special account which would be used exclusively for national dividend payments every month. This money would not be accessible to Treasury or any other government department. The monthly payments (which would be akin to interest payments in some respects) would vary according to the implementation of monetary policy. The magnitude of such payments would be much larger in the context of a full reserve system (or its equivalent) than for a fractional reserve system. This is just a very crude description — you can find further details in my previous postings in other threads..
That is a complicated farce that is completely unnecessary. In particular the bit that takes paying money to people out of direct democratic control.
If you’re changing the rules, you just let the Treasury pay people and have done with it – preferably via a Job Guarantee and other auto-stabilisers.
There is no difference between the central bank paying people and the Treasury paying people – because they are both part of the government sector.
‘ That is a complicated farce that is completely unnecessary. In particular the bit that takes paying money to people out of direct democratic control. ”
Paying money to the wider community is no more farcical, or complicated, or undemocratic, or for that matter unnecessary, than is the current practice of paying money to bond dealers. I have been discussing an alternative way of conducting monetary policy. And my proposal is demonstrably superior on several indices (including equity ans speed of distribution) to the current method of conducting monetary policy – in an endogenous manner – by buying/selling securities from/to bond dealers.
To be more specific, it is not in any way undemocratic, because the scheme would need to be set up by an act of parliament. Moreover, it is an example of financial democracy in action, in that the funds would be disseminated to the wider community via their transaction accounts, and thus would be far more likely to be spent on goods and services than would an equal amount of money deposited in the accounts of bond dealers.