I read an article in the Financial Times earlier this week (September 23, 2023) -…
I was going to write about retail sales and company profits data today but the short story is that retail sales continue to defy the predictions (stimulus packages work). I ran a regression model today to generate a (reasonable) forecasting model of retail sales behaviour up to the point the stimulus packages were announced (November 2008) and then projected out to April 2009 and compared the dynamic trend with the actual data. Every data point since November 2008 is above the trend (which is why the ABS has abandoned its trend series for the time being). But it does tell you that the Australian economy is withstanding the world downturn. We will know more on Wednesday, when the national accounts (GDP) data comes out. Anyway, there has been more engagement with the “other side” or should I say “another side” today and I guess I should respond to that. And so the saga continues for another day.
Today, Mike Beggs offered another volley on his blog Mitchell strikes back, which sounded like the Empire Strikes Back although I must admit I was never a Star Wars fan. But if billy blog is an empire then that sounds good to me!
I also received some comments from my sometime co-author and close friend Warren Mosler, who is a significant player in the financial markets who among other things orchestrated the largest futures delivery to date (over $20 billion notional) in Japan in 1996 and created the current euro swap futures contract. So he knows a bit about how financial markets and central banking works and how the traders react. He calls himself an “operations sort of a guy”. He has been following the discussion here and decided to offer his thoughts. Accordingly, I denote his reactions to Mike Begg clearly to distinguish them from my own.
Mike begins his retort today by saying that:
First, Mitchell skips right over my central criticism: that the expectations and opinions of wealth-holders matter even when they are wrong. Even if money works the way Mitchell thinks it does, if money managers expect a fall in the value of the currency, they’re going to speculate against it …
I didn’t skip over anything. It didn’t seem to be central to anything much. I made the point that the AUD reached its lowest point in recent history when we were running record budget surpluses. I also cannot see that worrying about what the amorphous financial managers might or might not do doesn’t help us to understanding how a fiat monetary system operates. How does this actually tell us how the monetary system operates? It just tells us that profit opportunities exist which speculators seek to take advantage of. This will alter the exchange rate some times up and down.
In a past blog – Why pander to financial markets? – I outlined the recent history in Argentina which is the only sovereign nation to successfully default on foreign debt. Argentina demonstrated something that the World’s financial masters didn’t want anyone to know about. That a country with huge foreign debt obligations can default successfully and enjoy renewed fortune based on domestic employment growth strategies and more inclusive welfare policies without an IMF austerity program being needed. And as growth resumed there, FDI from the first-world financial funds flooded in. It is clear that many foreign firms fairly quickly returned to invest in Argentina after the crisis and default. The country’s biggest real estate developer explained (in 2005) the quandary facing the neo-liberals as such: “there has never been a better time to invest in Argentina … [as for foreign banks, after shunning Argentina for a while] … now the banks are coming to us … It’s been tough. We will have restrictions … But in terms of access to capital, what defines access? Greed. When opportunities look profitable, access to capital will be easy.”
Anything but what Mike is worrying about!
Moreover, it is always good to see what the evidence tells us. Here is a graph from December 1973 to December 2008 for Australia which shows the relationship between the federal budget balance (horizontal axis) and the $AUD exchange rate (with the USD). I can present any number of parities (AUD against X) which will look similar. I can also do the same graph for most nations which the same result. The straight line is a simple regression which if anything points towards surpluses generating depreciation (although that was inserted for a bit of fun). In general, I don’t run bi-variate time series regressions and think they tell us anything much at all.
The graph is very instructive as it covers the full spectrum of budget outcomes in our recent history (that is, wide variation between surpluses and deficits) and also is mostly in the flexible exchange rate era. It would be very difficult to argue coherently that in the real world, financial managers are out there depreciating currencies when deficits are being run and vice versa otherwise. Quite clearly there is no strong relationship between the budget outcome and our exchange rate. The theory doesn’t tell me there would be and the evidence confirms it.
So I think Mike has been reading a bit to much News Limited lately and is seeing shadowy financial market agents around each corner just ready to sell off the AUD and wreak havoc.
The graph does not provide any comfort for the view that any long-term impact from financial markets will accompany budget deficits. Warren Mosler agrees. He said in relation to whether the opinions of wealth-holders matter even when they are wrong:
Yes, but in the short term only.
Mike then moved to criticising the view that taxes generate a demand for fiat currency, which is non-convertible and otherwise worthless. The following interchange is relevant. Mike Beggs:
Mitchell implies that the demand for domestic currency to pay domestic taxes underpins its value, such that the movements out of the currency by wealth managers would be foiled by their need to pay tax.
No, it’s that the price level can be stable with appropriate fiscal policy even with no net desire to accumulate $A financial assets.
My position is this. One has to be careful when you say someone “implies” something. It usually means they didn’t and you want to suggest they did. The point I always make is not the that which Mike insinuates. The relevant point here is that it doesn’t matter what the financial managers really do. A sovereign government can always use fiscal policy to create a buffer stock of workers (the Job Guarantee), employed at a fixed wage to stabilise the price level even if no-one wants to buy any financial assets in the currency of issue.
Further, I don’t think I said anything about wealth holders in particular. It is a fact that in some nations several currencies circulate (typically USD and the local currency). But it is a fact (I have seen it!) that as long as the government can enforce the tax obligations on its citizens in the local currency, then they will always demand that currency even though the rest of the world thinks of it as a junk currency.
A fixation on the fact that tax payments are denominated in national currency is common among cartalist (state) money theorists. I’m not entirely sure why – there will also be a demand for currency arising from its legal tender status,
Not at all. In fact the EU studied that when putting the Euro together and as they stated they found no reason for a ‘legal tender’ requirement and did not include it in the treaty. In the US, the term legal tender only means discharge in a court of law need only be in $USD. and this has no effect on the value of a currency. It’s just a numeraire function. So forget the notion that legal tender status somehow defines the value of a currency. It’s not the case as a point of logic, history and evidence.
… from the need to make all kinds of payments denominated in it – why single out tax payments?
That’s all there is, mate!
My position is this. You also have to go back to first principles to understand how things work. Unless you do that you can be lulled into false associations. Think back to the A simple business card economy or to the UMKC Buckaroos model, which are both pedagogic devices to help us focus on the essential characteristics of a fiat monetary system where the currency unit has no intrinsic worth and is not convertible into anything of value. When I wanted my kids to transfer private labour into the public sphere I offered them my business cards – 100 a month or something. They looked askance and said “whatever” and kept playing with their electronic gadgets. I then added that they would have to pay taxes of 100 a month in the business cards to live in the house. They thought for one second and then said “when do we start work”. Immediately private resources were transferred to the public domain and my spending of otherwise worthless cards both accomplished this and provided the kids with the capacity to pay the taxes.
In time, the kids might start using these cards as a convenient means of exchange but that doesn’t alter the basic reason they desire to get hold of at least the tax quantum each month.
How else would I get the private sector (kids) to transfer work to the public sector (house) if I didn’t levy a tax to provide a demand for my otherwise worthless currency (business cards)?
At any rate, if the government is running a deficit and not issuing equal amounts of bonds, it is – by definition of the word ‘deficit’ – injecting more money into the economy than it is calling back in taxation.
Only under a very narrow definition of ‘money’ that has no influence on credit and the real economy. Causation runs from loans to deposits and reserves, and never from reserves to anything else. Hence the massive Japan quantitative easing had no ‘monetary’ effect nor has the UK or US had any. Government spending in the first instances adds that many clearing balances to accounts at the central bank. Securities sales offer alternatives to clearing balances. That’s all there is to it.
My point here is one of logic. If the government is spending more than it is taxing it is running a deficit as a matter of accounting. It doesn’t matter whether they drain some or all of the positive net spending by bond issuance – it is still a deficit. If G = 100 and T = 50, the deficit is 50 no matter what the value of bond sales equals. I just don’t understand what Mike is getting at here.
We (Mike, Warren and Bill) all agree on the following points but Warren and Bill think they are not relevant to the discussion at hand:
- If wealth-holders sell the local currency to buy foreign currency doesn’t destroy the local currency, which remains in someone’s hands.
- Even if at a lower value in terms of other currencies and goods, it still remains available to pay taxes, even if individuals have to borrow back some of the currency they’ve sold to do it.
- Currencies can and do dive in the foreign exchange markets despite the government that issues the currency requiring tax payments in its own currency.
Mike then starts to discuss Banks and the supply of currency as an attempt to defend himself from my claim that he is stuck in the old gold standard way of thinking about money multipliers. He says:
My argument is not at all based on a money multiplier conception as Mitchell presents it. My thinking on money is also heavily influenced by post-Keynesian thought, especially the so-called ‘structuralists’ such as Hyman Minsky and Victoria Chick. I note that Mitchell includes Minsky as one of his ‘modern monetary theorists’ but Minsky is miles away from his cartalism.
I will call in another of my co-authors, Professor Randy Wray sometime to comment on this. Randy was Hyman Minsky’s doctoral student and assistant for some years and knows him better than most. He will clearly tell us all that Mike just is talking nonsense here. Hyman understood what we now call modern money and advocated Job Guarantee schemes in his earlier days. In later life he concentrated on debt cycle dynamics. But Randy will tell us all better than I can because he was close to Minksy. At present Randy is travelling and it might be some time before he gets a chance to offer anything.
Then Mike Beggs says:
Banks are traditionally constrained in their lending by a couple of factors. First, they need to be able to meet net withdrawals and net transfers to other banks with currency, and since their assets tend to be less liquid (i.e. readily saleable) than their liabilities, a bank needs either an adequate reserve of currency or a way to quickly get its hands on some when it needs it.
That’s a throw back to the gold standard and other fixed exchange rate regimes where banks need actual convertible currency to meet withdrawal demands, and even the central bank is limited to its actual gold supply (or foreign exchange reserves) when lending to member banks. With non convertible currency this supply side constraint on currency is not applicable. Banks get all the cash they want from the central bank on demand on very short notice, as well as funding from the central bank.
My position has been spelt out in several blogs. Please read – Money multiplier and other myths and Quantitative easing 101 and Gold standard and fixed exchange rates – myths that still prevail – for starters.
Banks are only constrained by the number of credit-worthy customers that want to do business with them. The restrictions that convertibility placed on reserve management do not arise in a fiat monetary system. That is a basic indisputable fact Mike.
Mike then describes certain features of the banking system which we all agree on.
Disagreement soon reemerges. Mike Beggs says:
The question relevant to the discussion here is: will the central always be able to soak up extra currency that finds its way into the money market as a result of unfunded government deficits?
‘soak up’ only means ‘offer alternative deposits’ which include treasury securities (they are functionally nothing more than time deposits at the central bank). The central bank can do that all it wants as part of its rate setting process to support rates at its target, no matter how much more government spends relative
The central bank can always pay a support rate on the reserves or offer a government bond. If the commercial banks resist either and there is are excess reserves overnight then the banks are not earning to potential. They may initially try to place those excess reserves in the interbank market but if it is a system-wide excess this will prove futile. Transactions between non-government institutions (for example, the banks) can not create or destroy net financial assets in the currency of issue. They can shuffle ownership or change the composition only.
On transactions between the government and the non-government sector will result in net creation or destruction of financial assets in the currency of issue.
But then I am wondering why Mike is concerned with this anyway.
Then Mike turned to the sectoral balances. He says by way of attack:
The fundamental problem here is that Mitchell is taking highly aggregated national accounting identities and trying to turn them into things of causal significance. He implies that given a structural current account deficit, it is better that the government run a deficit than the domestic private sector. Why? Because if the private sector keeps accumulating debt it will eventually have to try to pay it down, whereas the government is not constrained in such a way, and can continue to accumulate indefinitely.
Bill’s take makes perfect sense to me.
The sectoral balances are as Mike notes – accounting structures. To use them in analysis you have to invoke a theoretical structure which will then give meaning to the identities. The domestic private sector as a whole (remember we are talking macroeconomics here) cannot keep accumulating ever-increasing levels of debt. It does not have the capacity to service ever increasing levels of debt.
The trouble is, though, that there is absolutely no guarantee that a government deficit run deliberately to offset the structural current account balance would have the intended effect. By increasing domestic demand it is actually likely to have precisely the opposite effect. Factor in the inevitable reactive capital flows and movements in the exchange rate, and who knows what the ultimate effect would be (well, probably an increased current account deficit).
‘Who knows’ is different from ‘likely to have precisely the opposite effect’.
Yes, it is possible that running a government deficit will add to aggregate demand and may not result in a drop in private sector borrowing and therefore an identical current account balance. And I’m sure Bill would more than agree with that.
Policy response is most clear in a situation like what we have today, where the unemployment is evidencing a lack of aggregate demand that can be immediately reversed by altering fiscal balance. And this is best down from the bottom up with something like Bill’s Job Guarantee as it also improves the quality of the labor buffer stock by making it an employed buffer stock versus today’s unemployed buffer stock. With an improving private sector all the evidence is they prefer to hire those already employed and shun unemployed. Argentina is a prime example where of nearly 2 million employed in a similar program in 2001 (Jefes program) about 750 000 were subsequently employed in the private sector over the next two years. These were all people who had never worked in the private sector and never would have.
While I do agree that that is possible I also think that the long-term desire of the domestic private sector is to net save. That has been the historically typical pattern. In that sense, only some of the extra demand will end up manifesting as an increase in the current account deficit. But so what?
Are we now having a discussion about the merits of a current account deficit? It just means that the foreign sector wants to accumulate financial assets denominated in our currency and are prepared to ship more real goods and services to us than they want back from us. We gain from that!
On a side point, Mitchell is wrong to say that “the non-government sector cannot fulfil its tax obligations unless the government has spent first”. Currency also enters private sector balance sheets via central bank activity.
Bill rightly includes the central bank as part of the government.
This was exactly the point I was making in response to Sean Carmody’s comment. That while the RBA might be “independent” in rhetoric it has to be part of the consolidated government sector because its operations involve the creation/destruction of net financial assets in the currency of issue. So Mike must not have read that part of the blog.
The discussion then moved to the Job Guarantee which is moving away from the underlying operations of a fiat monetary system so I won’t add much here. But Warren did have some comments.
Mike says by way of repetition:
As I said in my original post, it’s not the Jobs Guarantee I have a problem with, it’s Mitchell’s idea that the government is completely unconstrained by budgetary concerns.
It is unconstrained operationally. Today all government spending, is nothing more than changing numbers in bank accounts.
After making some statements about me being eccentric, Mike then says:
In the right conditions, I would support a government trying out something like the Jobs Guarantee, which is basically a large extension of government employment at the minimum wage to mop up unemployment. But while Mitchell expects it to be a stable remedy for unemployment, I would expect it to be economically destabilising.
A buffer stock is only valuable if it can be ‘resold’ to the market. Hence a butter buffer stock needs to be kept at the right temperature, and a wool buffer stock kept up as well to be useful. Same with a labor buffer stock. Keep it unemployed and it depreciates quickly to the point it has no value in stabilizing wages in an expansion. Only if it’s kept ‘liquid’ and ready to go to work does it have any stabilizing value. And you can get useful work out of it as well, which beats the inherent real costs of keeping an unemployed buffer stock.
Mike goes on to explain his claim of instability:
The reason is that capitalism relies on a certain level of unemployment to discipline wages.
Yes! As above. That’s how all buffer stocks work.
I would briefly add that this is an old line stemming back to Marx and the more modern restatement of it is Michel Kalecki’s The Political Aspects of Full Employment. I have written extensively examining this notion and conclude that the conditions that Kalecki and others were talking about in the 1940s (strong trade unions, high proportion of full-time work; etc) are not as relevant now. Further, the longer one is unemployed the less effective they will in “disciplining” the distributional struggle. So unemployment ultimately doesn’t provide the strong threat that it may have in previous epochs. A much stronger threat to the wage demands of some would be a pool of Job Guarantee workers who have not suffered skill atrophy. The Job Guarantee is likely to lower firm hiring costs because the residual damage associated with unemployment are not present.
The Jobs Guarantee is designed to be non-inflationary by setting its wage at the minimum wage. But I think even then it would remove much of the sting from unemployment, make employed workers feel more secure, and embolden labour.
But provide a ready source of labor that an unemployed buffer stock does not provide. That’s the far more important aspect of stabilization.
My point is as above. I consider the Job Guarantee to be a much more effective tool to anchor inflation than unemployment.
Great, you might say, and I would agree – which is why I would support the policy. But it would destabilise in an inflationary direction, and present the government with choices it faced at the end of the full employment period in the 1970s: extend its controls in further reforms: price and wage controls, capital controls, public investment, etc.,
That policy supplied demand from the top down with the usual consequences you describe. Bill is working from the bottom up which is entirely different.
We must realise that the Keynesian remedies for unemployment which Mike refers to here have nothing to do with the Job Guarantee approach which creates a buffer stock of workers at the minimum wage by buying labour resources that have no market demand. If the Government was to try to expand employment to full capacity by a general competition for workers (paying market prices) then I suspect Mike’s forewarning would come true. I have written about that often. That is the whole logic of the Job Guarantee (note Mike calls it a Jobs Guarantee which is not the terminology that I have used for some years now).
Employing labour resources at zero bid cannot be inflationary.
Anyway, that is enough “engagement” for tonight.