Saturday Quiz – April 19, 2014

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1. I am living in Greece. Right now Greece is the subject of an expirement of how a country could leave under the rigime of the neoliberal economics!! On every day basis the state is destroyng, the wages is redusing, the social security sytem also is repealed, as else health and public education. Moreover the privatization of the state materialized. Take in account that we have foreign money.

   So we wait to see if the powers of the free market we will put Greece in the development track.

2. Can I ask whether you would disagree with any of the statements made by Professor Joseph Huber in his recent paper, “Modern Money Theory and New Currency Theory” ?

   I have checked your comments policy and am not associated with the above paper or the above Professor. I am simply interested in whether you would disagree with his points on MMT and whether you believe there is any need for reforming who creates $AUD in Australia.
   Cheers
   David

3. Dear David Collett (at 2014/04/21 at 12:28)

   I have been asked before to comment and my answer was that there is insufficient scholarship in Huber’s paper to warrant it. For a start he doesn’t even cite the major MMT works in the academic literature.

   best wishes
   billhttps://billmitchell.org/blog/wp-admin/edit-comments.php#comments-form

4. Hi Bill,

   Thank you for the reply.

   In your working paper on MMT you state: “We juxtapose them against the relevant operational reality presented
   by MMT (see Mosler, 1997-98; Mitchell, 1998; Wray, 1998; Mitchell and Muysken, 2008).”
   http://e1.newcastle.edu.au/coffee/pubs/wp/2013/13-06.pdf

   Can I assume the above three references are the best sources to put forward the case for MMT?

   Would other MMT proponents agree with the above list?

   You also state:

   “As noted above, a currency issuing government has no financial constraints and can never run out of money. Fiscal space is thus more accurately defined as the available real goods and services available for sale in the currency of issue. These are the “means” available to government to fulfil its socio-economic charter. The currency issuing government can always purchase whatever is for sale in its own currency.

   There are no financial constraints on a currency issuing government providing first class health care and/or pensions in the future.

   When we ask whether the nation can afford an initiative that a currency issuing government wishes to implement,
   we should ignore the $x and consider what real resources are available, as in levels of unemployment, equipment etc
   . Those available resources constitute the fiscal space. Whenever we talk about fiscal policy it should always be in relation to the fiscal space rather than centred on $x . The fiscal space should then always be related to the purposes to which we aspire, and the destination we wish to reach.”

   Can I ask if there was a reference for the above statements? There was a reference list at the end but I could not see how to link it to that section.

   My macroeconomics textbook (Jackson & Mciver 8th edition McGraw-Hill Irwin 2007, pg 303) says that deficits can either be financed by borrowing (selling interest bearing bonds to the public) or by the Reserve Bank issuing new money and keeping the cash rate the same (so that it doesn’t have an adverse impact on investment & consumption) and then states that the later would be more expansionary than the former and then never mentions it again.

   Is that where you believe the new money should come from to finance the job guarantee / first class healthcare? The RBA issuing currency and the government spending it without needing to pay it back or pay interest on it?

   Kind regards,
   David

5. “says that deficits can either be financed by borrowing (selling interest bearing bonds to the public) or by the Reserve Bank issuing new money a”

   Your macroeconomic textbook is wrong.

   It has the causality reversed.

   The correct sequence is that the central Treasury of the country spends, and the very act of that spending generates excess reserves in the banking system which the central bank accommodates to maintain its policy rate. It either accommodates by paying interest on reserves or by selling bonds into the market – which it gets from the Treasury so as to stop the overnight rate dropping to zero.

   In addition the Treasury regularly swaps low interest paying reserves for higher paying instruments in the Bond auctions. That drains the excess reserves.

   The spending and bond swapping operations operate in parallel and are not physically connected. Nobody ever bounces a government cheque. The spending happens and the Treasury debt management operation targets a value on the Treasury current account that they want to hit, selling sufficient Bonds to hit that target. The target is arbitrary and not operationally required. Treasury could just run an overdraft with the central bank instead.

   Bonds are sold for a different purpose – as we saw in Australia when Australia was running a surplus and there was squealing from many parties that Bonds would stop being issued.

   The ‘excess reserves’ in the banking system represent the net financial savings of the non-government sector.

   If you think about it for every $100 that a government spends it will *always* get back $100 in tax for any positive tax rate. That is just a simple mathematical progression – each transaction generates a certain amount of tax. The more transactions, the more tax until the entire $100 initially spent disappears.

   The only reason there is a difference between government spending and government taxation in any given accounting period is because people don’t spend instantly. In other words there is a delay between individuals receiving income and spending. That delay is what we call ‘savings’.

   Financial Savings are essentially voluntary taxation. When you leave money in the bank you are denying somebody else an income. The job of the government system is to allow you to save, while at the same time ensuring that everybody has an income. In other words to defeat the paradox of thrift.

   HTH

6. Hi Neil,

   No offense but I can’t just believe opinions because they have been asserted. How can I independently check whether what you are saying is correct or false?

   I would like to understand and be able to reference for future arguments I intend to have, the process by which Treasury can fund programs without incurring more debt, if that is currently possible. Obviously that means I need to read more..and there seems to be some relevant references from the draft sections of what Bill has been writing on his book to keep me busy for a while.

   But it is hard knowing what to trust. the textbooks seem to be wrong on certain topics. Seems the best source would be interviewing everyone at the RBA /Treasury to see how things actually work 🙂

7. “How can I independently check whether what you are saying is correct or false?”

   Ask the Treasury and the Central Bank – which is what the MMT economist did.

   Start from the basics. Why is it that you are unable to issue cheques as required from your account? Because the bank will refuse to cash them. They can stop the cheque and there is nothing you can do about it.

   Then ask yourself if that would be the case if you owned and controlled the bank, and everybody in it effectively worked for you.

   No, because they wouldn’t dare. The power relationship has changed fundamentally. You can insist and they must obey, or you will replace them with somebody who will obey.

   As Bernanke said under oath in front of the Joint Economic Committee in the US: “we are the agent, of course, of the Treasury and it’s our job to do whatever they tell us to do”

   All the rest is smoke and mirrors to make it look as though something else is happening.

   Watch what the magician is actual doing rather than marvelling at the illusion.

8. I think I will have to write to RBA/Treasury. I have it in writing from the RBA that nearly all the money in our economy was created via fractional reserve banking and that it will disappear when the loans are repaid.

   I don’t believe the argument that a power dynamic is enough to make a cheque clear from an account with no money in it. RBA & Treasury need to be doing what ever their charter / laws say they can and can’t do.

9. “I don’t believe the argument that a power dynamic”

   Why don’t you believe it?

   Is it not the case that the owner or legal controller of an organisation gets to tell it what to do? What constraint do you believe is there that would allow a non-sovereign entity to tell the sovereign entity that makes the laws what to do if the sovereign entity chose to insist. Wouldn’t such a constraint be anti-democratic?

   The sovereign entity can of course choose not to insist, and that is what gives you the current situation.

   You generally get this when you think in a serial, linearly and non-dynamic fashion. The operations of a bank, particularly the central bank, operate circularly, in parallel and in a dynamic fashion, and they are co-ordinated by price.

   The Bank of England has written a good set of pieces and done a couple of videos on the whole money process. Bankers have known this is how it works forever, because they operate the process every day.

   Good luck with your investigations.

10. “Is it not the case that the owner or legal controller of an organisation gets to tell it what to do? ”

    Yes, an owner/legal controller can set directions within the restrictions placed on them by the appropriate laws that govern them. A director of a company in Australia, or any senior manager in Treasury / RBA would have numerous legal obligations that determine what they can and can’t do.

    “What constraint do you believe is there that would allow a non-sovereign entity to tell the sovereign entity that makes the laws what to do if the sovereign entity chose to insist. Wouldn’t such a constraint be anti-democratic?”

    Sorry but I don’t understand this question. Treasury don’t make laws, parliament does. Treasury can only do what the laws allow them to do. I am guessing at what your question is about…a constraint could be Banks funding political parties that are completely dependent on donations, or promising board positions in order to maintain the status quo?

    Is that undemocratic? No, because everyone is voting for political parties that make it quite clear before election time that they are running an unsustainable/undemocratic business model which requires many millions of dollars worth of advertising to push their message out.

11. “Treasury don’t make laws, parliament does.”

    Treasury is the operational finance arm of the government. The government is the government because it has a majority in parliament. Finance Acts tend to be whipped through parliament.

    If the government gets its Finance Act, who in the central bank is going to bounce a Treasury payment instruction given that the appropriation has been approved by parliament? If they did would they not be denying the sovereign elected will of the nation? And would that not be a constitutional crisis?

    The sovereign entity is parliament, the government is the government because it has a majority in parliament, and the Treasury is the foot soldier obeying the commands of the government and through them the will of parliament.

    That is the power relationship in any functional democracy. Who will stand against the sovereign will of the nation and say ‘no’? If there isn’t anybody in the central bank, and they make the money, then there is no financing constraint.

    The sovereign entity can only bind its own hands.

12. Now that you are being a bit more specific, yes I agree that Treasury / RBA will do as they are told provided the appropriate laws are in place.

    At this point in time I have seen nothing to suggest the appropriate laws are in place for Treasury to be able to instruct the RBA to contribute to its desired expenditure programs.

    Yes parliaments have the capacity to whip up such an Act in a jiffy, but that is no reason to get our hopes up.

13. “At this point in time I have seen nothing to suggest the appropriate laws are in place for Treasury to be able to instruct the RBA to contribute to its desired expenditure programs.”

    You’ll find if you look that there is an effective infinite intraday overdraft within the clearing system for all central bank participants.

    That means you get to, figuratively speaking, inject at 11am, and drain at 2pm. It’s more dynamic and in parallel than that, but that is how the dynamic expansion is done within the current institutional arrangements.

    As I said before you need to stop marvelling at the magician’s skill in presenting the illusion, and understand actually how the illusion is performed.

14. 🙂

    Neil the logic of your response supports my view.

    If there is an effective infinite intraday overdraft within the payments clearing system for all participants, then any expenditure attempted by the Treasury at 11am for say increased welfare payments, needs to be returned by 2pm before the end of that very same day.

    Also, your link to the BoE helped me articulate the hesitation I was having with the assertion that Treasury has no restrictions on its ability to fund expenditure programs. I added my comment to the bottom of the Options for Europe – Part 69 page: https://billmitchell.org/blog/?p=27635

    I support the view that fiscal policy should include full employment (and that’s full employment with accurate employment figures unlike the present reality) as a primary goal, however, I am just having some hesitations about how that can be implemented.

    Kind regards,
    David

15. “then any expenditure attempted by the Treasury at 11am for say increased welfare payments, needs to be returned by 2pm before the end of that very same day.”

    It is. That’s how it works – with a large float to handle the buffering and timing issues. The final intermittent bond issue restore the float over a larger time period – effectively recovering the money drained from the float into other RBA accounts.

    That’s just standard treasury style operations – as you see in any large organisation. The point is that there is more money in the economy at 2pm because of the 11am injections thereby increasing the demand for whatever paper you’re offering to swap for it at 2pm.

    Totally unnecessary of course. The Treasury could just run an overdraft instead. But the system is set up so that private operators can take that paper, present it to the RBA for repo reserves if they wish and pocket a tidy fee for doing precisely nothing.

    All because somebody want to pretend, politically, that Treasury isn’t running an overdraft, when Bonds are just the overdraft in paper form.

    It doesn’t support the model you have in your head though. You’re still thinking there is a restriction, and you’ve yet to come up with the person that will say no.

    It’s all just moving numbers around in the RBA accounts. There and back again. It’s a closed system.

16. >At this point in time I have seen nothing to suggest the appropriate laws are in place for Treasury to be able to instruct the RBA to contribute to its desired expenditure programs.

    The above statement I made can be clearer: “At this point in time I have seen nothing to suggest the appropriate laws are in place for Treasury to be able to instruct the RBA to contribute to its desired expenditure programs by issuing currency or crediting bank accounts willy nilly, other than by the Government issuing bonds to raise cash.”

    Back to your reply, “All because somebody want to pretend, politically, that Treasury isn’t running an overdraft, when Bonds are just the overdraft in paper form.”

    I agree government bonds are an overdraft in paper form, but I don’t believe the claim that Treasury can run a significant overdraft from its accounts with the RBA.

    This is supported by what the RBA states about what it does with Treasury accounts and I quote, “…and access to a strictly limited overdraft facility.”
    http://www.rba.gov.au/fin-services/banking.html