Friday lay day – lightweight garbage from The Economist

Its my Friday Lay Day blog and I have several deadlines on other projects coming up like today even! But I am sick of the Economist Magazine being held out as a voice of moderation and sound analysis. It has always been a merchant of so-called free market myths and adopting the conservative, anti-government intervention line. It claims that it “offers authoritative insight and opinion on international news, politics, business, finance, science and technology”. It frothed lovingly when Margaret Thatcher was running her wrecking ball through the UK under the guise of ‘reform’. It didn’t say a word when the financial market deregulation that her government and its successors, including Tony Blair’s New Labour, set in place and fostered, started to turn ugly well before the crash that started the GFC. It is not moderate at all. It has come to the Attack Corbyn Campaign somewhat later in the piece but better late than never I suppose. It article (September 24, 2015) – Murphy’s law unto himself – is a disgrace. Its reveals that the Econmomist is a tawdry little rag that feigns understanding but reveals ignorance. This article is really just a spewing out of some poor undergraduate mainstream macroeconomics textbook chapter or two without any guile or deeper comprehension.

It is an attack on the so-called (and badly named) People’s Quantitative Easing (PQE) that Jeremy Corbyn proposed in his – The Economy in 2020 – manifesto.

I considered PQE, which I prefer to call Overt Monetary Financing (OMF) in some detail in these blogs:

1. PQE is sound economics but is not in the QE family

2. Jeremy Corbyn must break out of the neo-liberal framing

3. OMF – paranoia for many but a solution for all.

4. Keep the helicopters on their pads and just spend

Note Stephanie Kelton added a G to the OMF and thought that was funny (Overt Monetary Financing of Government). I laughed too!

Scott Fullwiler also added this knowledge on September 14, 2015 – Corbynomics 101-It’s the Deficit, Stupid!.

There was an interesting article on OMF (PQE) – Time for “Quantitative Easing for People instead of Banks” (PQE): Raining Money on Main Street – from Ellen Brown on September 23, 2015 that is worth a look at.

Once you get your head around the material in those blogs then you will see how poorly crafted the Economist Magazine article really is.

Anyway, the Economist Magazine, with the intermediate macroeconomics textbook opened on the desk, says that:

To recap on PQE: it is a radical twist on a policy that the Bank of England has pursued since 2009. Instead of using newly created money to buy government bonds, as happens under ordinary QE, Mr Corbyn seems to want the BoE to use that cash for more productive purposes, by buying bonds from a proposed national investment bank.

Which is its first major error.

OMF is not related to QE. They are fundamentally different operations with fundamentally different impacts on the non-government sector.

The differences are (see PQE is sound economics but is not in the QE family:

1. QE does not change the net financial asset position of the non-government sector at all – that is, the net wealth remains unchanged. It is an asset swap. The non-government sector just rearranges is wealth portfolio – more cash, less bonds. No net change.

That is the essence of a – monetary policy operation – which alters the liquidity in the economy. It does it by portfolio swaps and in doing so influences the interest rates and the term structure.

2. PQE (or OMF) means the central bank, as one part of the consolidated government sector, the other being the Treasury, would use the currency-issuing capacity of the government to facilitate the purchase of real goods and services to build productive infrastructure.

The NIB is just a fancy title for a government agency and would be engaged in public spending – that is, in a fiscal operation. It would be spending out of some account the Bank of England created on its behalf and filled with numbers, presumably with many zeros after the first few digits.

PQE is not QE because it is a fiscal operation, which means it would increase the net financial assets in the non-government sector because it would increase national income (via spending on infrastructure).

PQE as envisaged is a fiscal operation, not a monetary operation, whereas QE as practiced by the Bank of England, the Federal Reserve Bank of America, the Bank of Japan etc are not fiscal operations.

That is a fundamental difference and so the arrogant assertion that PQE is just a “radical twist” on QE is plain wrong and betray the ignorance of the writer. I suppose the intent was to get the “radical” in there somewhere early in the article to ensure the reader was already feeling a little insecure about Jeremy Corbyn proposed policies.

The rest is immature undergraduate stuff – the sort of stuff that indoctrinated students regurgitate in examinations thinking an uncritical rendition of some erroneous textbook they are using is what constitutes education.

First, there is the attack based on PQE’s alleged compromise of central bank independence. The Economists trots out the usual line that central banks are largely independent and that is good because “it makes it less likely that politicians will engineer a pre-election boom”.

You know the line – the crazy politicians will go and spend like drunken sailors with all that central bank money so they have to have some unelected officials in the central bank stopping them.

But the reality is that governments appoint central bank offiicals (boards etc). In many nations, the elected government can change the monetary policy decision if it doesn’t like it. Yes, this would create a major issue but it can be done.

More importantly, and apparently not understood by the Economist author is that every single day the government (treasury/finance) and the central bank are in close dialogue about the patterns of government spending and taxation and the impacts those patterns will have on the state of liqudity in the system.

The central bank needs to manage that liquidity in order to ensure its monetary policy targets are met.

So, in practice, they work together which makes the appeal to ‘independence’ look a little wan.

Please read my blog – The sham of central bank independence – for more discussion on this point.

What the conservatives don’t like is the fact that the proposal frees up the government to spend without rising public debt. The latter is used by the conservatives as a battering ram to keep governments from acting in the best interests of the wider public.

Of course, the conservatives also want rising debt ratios because public debt is corporate welfare and the elites love to indulge in their risk free annuities. But they don’t let on about that do they?

So where might the Economist article go next. That’s right – we could have written it for them – straight onto the ‘inflation bogey’.

We read that:

… the criticism is really that monetary financing of government deficits is a problem … The problem is as follows. Let’s assume that inflation rises back to 2% … Prime Minister Corbyn wants to build lots more houses. With PQE, he could lean on the BoE to buy the debt that he had issued to finance those investments. Now, the link between money supply and inflation is far from precise; but you can see why there might be a big problem with allowing the prime minister simply to print money to finance deficit spending. At some point, increasing the money supply will boost inflation to unwelcome levels; and, no matter how much you hate them, international financiers will worry if the BoE’s independence seems compromised.

We might ask the writer to explain why Japan hasn’t had hyperinflation given its expanding money supply over the last twenty or so years?

The crucial phrase is “At some point, increasing the money supply will boost inflation to unwelcome levels”. And what point might that be?

The only constraint that the government would have to be aware of would be the limits of the available real resources that it seeks to deploy in productive ways.

When that limit is reached, any further boost to nominal aggregate spending – no matter where it comes from – will add to inflationary pressures.

Why would the government keep increasing the growth of its spending once the economy was beyond full employment and was no longer able to increase output?

But it is false to claim that increasing the money supply will be inflationary. That is Monetarist nonsense. The money supply can increase continuously without there being any inflationary pressures.

OMF does not increase the risk of inflation.

The reason they keep making these false predictions is that they rely on two textbook notions – one which is just plain wrong while the other has limited applicability during a recession.

The first notion is the rather technical sounding concept of the ‘money multiplier’, which links so-called central bank money or the ‘monetary base’ to the total stock of money in the economy (called the money supply).

The second notion then links the growth in that stock of money to the inflation rate. The combined causality then allows the mainstream economists to assert that if the central bank expands the money supply it will cause inflation, which is their prima facie case against OMF.

As is often the case, many financial commentators who wax lyrical about the dangers of OMF do not even fully understand the theoretical route that is alleged to link central bank monetary expansion with inflation.

Please read my blog – Money multiplier and other myths – for more discussion on why the money multiplier is a flawed concept and inapplicable to the real world.

The second flawed aspect of the antagonism against OMF relates to the mainstream theory of inflation captured by the so-called Quantity Theory of Money (QTM).

The QTM links the expansion of the money supply with accelerating inflation. It is the most intuitive part of the neo-liberal story and the one that resonates with the public.

While the QTM was formulated in the 16th century, the idea still forms the core of what became known as Monetarism in the 1970s and is the principle reason for the taboo against OMF.

The QTM posits that an expansion of the money supply causes inflation because it adds nominal spending growth to a fully employed economy.

The only way the economy could adjust to more spending when it was already at full capacity was to ration that spending off with higher prices. Financial commentators simplify this and say that inflation arises when there is ‘too much money chasing too few goods’.

The main problem with the theory (there are several) is that capitalist economies are rarely operating at full employment. The Classical theory essentially denied the possibility of unemployment.

The fact that economies typically operate with spare productive capacity and often with persistently high rates of unemployment, means that it is hard to maintain the view that there is no scope for firms to expand the supply of real goods and services when there is an increase in total spending growth. If a firm has poor sales and lots of spare productive capacity, why would it hike prices when sales improved?

Thus, if there was an increase in availability of credit and borrowers used the deposits that were created by the loans to purchase goods and services, it is likely that firms with excess capacity will respond by increasing the supply of goods and services to maintain or increase market share rather than push up prices.

In other words, an evaluation of the inflationary consequences of OMF should be made with reference to the state of the economy.

If there is idle capacity then it is most unlikely that OMF will be inflationary. At some point, when unemployment is low and firms are operating at close to or at full capacity, then any further spending, whether funded by OMF or some other scheme, will likely introduce an inflationary risk into the policy deliberations.

OMF does not increase the inflation risk at all.

All components of total spending, private consumption expenditure, private investment, exports and government consumption and investment spending carry inflation risk if they become excessive. Inflation is caused by total spending growing faster than the capacity of the economy to produce real goods and services in response.

In that situation, firms have no flexibility to increase production, and thus ‘ration’ off the spending growth by putting up prices. Significantly, the reserve position of the banks is not functionally related to that process.

The central bank can ‘sterilise’ the liquidity impacts of the deficit spending by selling bonds to the private sector. But that doesn’t reduce the inflation risk of the initial spending. It just means the private sector has more bonds and less deposits. The government spending has already occurred. Of course, no responsible government would desire to expand the economy beyond its real limit given the political problems it would face should inflation rise sharply.

OMF thus doesn’t add any new elements to this risk.

On the Economist’s claim that the international financiers would ditch the UK if OMF was introduced – just ask Japan if they cared about them!

Please read my blog – Who is in charge? – for more discussion on this point.

Students in every mainstream macroeconomics class, and that means almost all students, would have predicted, based on the nonsense they were learning, that the high deficits and high public debt ratios in Japan at the time, should have driven interest rates sky high, that bond markets should have stopped buying government bonds, that the government should have run out of money, and all the time that these disasters were unfolding, that inflation should have been be galloping towards hyperinflation.

These consequences did not happen. Why? The mainstream textbooks are largely wrong.


This was a very tawdry little article. The writer should be ashamed of him/herself pumping such garbage out into the public space.

Fun word analysis tool

This little tool – Analyze Words – analyses word usage in terms of personality traits.

It is the work of – James W. Pennebaker – an American social psychologist, who researches how language reflects “basic social and personality processes”.

Here is the science that underpins the results of the tool.

Oversee mass fraud and take home a few mill!

The recently (pushed out) VW boss who is responsible for anything that happens within his company has demonstrated how the corporate world rewards its own – stuff up or otherwise.

Apparently he “is expected to qualify for a €1m (£740,000) annual pension and could also be in line for a €3.2m payoff. Winterkorn’s salary of €1.6m was topped up to nearly €16m last year as a result of bonuses and loyalty payments” (Source).

The only question I have is how many of them will go to prison for extended periods for their criminality.

Groupthink paranoia

One of the characteristics of groups that are caught up in their own umbrella of denial is that they become deeply suspicious and paranoid of any evidence that appears contrary to their maintained hubris.

A classic case of this was revealed yesterday in the Australian press. The national broadcaster ABC reported (September 24, 2015) – Tony Abbott’s department discussed investigation into Bureau of Meteorology over global warming exaggeration claims, FOI documents reveal.

What is that about?

Tony Abbott, our recently deposed Prime Minister and now running hard to be labelled the worst PM in our history (and that takes some beating given the bevy of conservative dunces that we have had to mostly deal with), is a climate change denialist.

He scrapped the carbon tax and think coal is the future of humanity.

Apparently in August and September 2014, after the Murdoch right-wing rag The Australian (our only national newspaper) wrote some ridiculous articles which claimed that the Bureau of Meteorology’s (BoM), the national public weather organisation had published temperature data which was:

… wilfully ignoring evidence that contradicts its own propaganda.

The claim was that BOM was deliberately altering historical climate data “to exaggerate estimates of global warming”.

The then PM Abbott, then considered setting up a “taskforce to carry out ‘due diligence’ on the BoM’s climate records”, seemingly believing every word The Australian wrote.

He was advised that “The way the Bureau manages its climate records is recognised internationally as among the best in the world”.

But his office still considered an investigation (‘star chamber’) was necessary to force BOM officials to account for themselves.

The report notes that then the buffoon-like chair of the PM’s “business advisory council” pushed the matter further with a ridiculous article in the conservative press demanding a review of the BOM.

Music – Early Bob Marley

Here is a classic from 1965. Recorded at Clement ‘Coxsone’ Dodd’s Studio One in Kingston, Jamaica. It features a very early Bob Marley and the Wailers (Bunny Wailer and Peter Tosh) with the Soul Brothers Orchestra.

It is the classic rock steady of the era – heavy reverb and gorgeous harmonies. Rock Steady evolved out of Ska during this period and is the precursor to Reggae music. It was slower and more soulful than Ska music.

The Soul Brothers Orchestra emerged in August 1965, just after the Skatalites disbanded (for the first time) and included ex-Skatalites members Jackie Mittoo (keyboards), Roland Alphonso (tenor sax), Johnny Moore (trumpet) and Lloyd Brevitt (double bass).

They were augmented by Wallin Cameron (guitar) and Bunny Williams (drums)

They took over from the Skatalites as the Studio One house band. They played their own music (Ska and Jump-Up) and appeared on stacks of albums from other artists, such as the Wailers.

Their sound developed from the Skatalites as electric keyboards and guitars became the norm.

Anyway, a nice background to typing this morning. I still have the 7″ disk – when records were records!

Saturday Quiz

The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.

This Post Has 29 Comments

  1. The Australian Bureau of Meteorology is an organization of scientists working in a very complex field.
    Like all scientists they are subject to peer review. I’m sure that if any of them were discovered cooking the books there would be hell to pay.
    That Abbott & Co were going to try and discredit them is indicative of the puerile nastiness of that crew. Whether the Turnbull regime will be any improvement remains to be seen. It is well to remember that under the Westminster system a Prime Minister is essentially the prisoner of his parliamentary colleagues.There is still a large reservoir of puerile nastiness in the government ranks.

    Anyone who doubts the verisimilitude of the BoM need only take a good look at their website. It is a rich mine of information along with appropriate statements about the reliability of the information and their interpretation of it.
    In short,it is superb science.

  2. Dear Bill

    Suppose that an economy has, say, 10 sectors. 2 of them, A and B, are operating at full capacity and 8 are operating below full capacity. Now there is fiscal expansion, and as a result, all sectors undergo a rise in demand. That should cause some inflation in sectors A and B. The fact that the economy as a whole is operating below capacity does not imply that every sector is underutilized, just as some parts of a country may have a high vacancy rate while in others the number of people looking for a rental unit exceeds the number of vacant units.

    Regards. James

  3. Dear Bill,

    My only quibble with your article is the claim that “PQE as envisaged is a fiscal operation, not a monetary operation.” Since PQE consists essentially of having the state print money and spend it, it follows that the private sector’s stock of base money rises as a result of PQE.

    In fact you actually in the previous sentence that PQE increases “the net financial assets in the non-government sector”. So I suggest PQE is part fiscal and part monetary.

  4. “A and B, are operating at full capacity ”

    Suppose they’re not – because they never are.

    *no* business operates at full capacity. What happens is what always happens. Jobs that hit the limit *go on a queue* and are picked up when the natural up and down variation of jobs creates slack.

    So you ‘hit the limit’ long before you hit the limit.

    The trick is to encourage abandonment and delay rather than price competition – and the best way to do that is to make investment patient money via equity rather than impatient money via bank debt.

    This is all standard contention management stuff – the sort of stuff call centres and telecoms companies have dealt with for years.

  5. “So I suggest PQE is part fiscal and part monetary.”

    All fiscal is part fiscal and part monetary.

    Standard QE is part fiscal and part monetary too – since the Bank reserves the banks end up with are largely, if not exclusively, there due to prior government spending.

    The government spending happened in both cases. The increase in savings happened in both cases.

    The only difference is that with QE and Gilt was issued and then taken away, whereas with PQE you just cut out that step.

    The intention with PQE is different though. The intention is to engage additional real resources in the economy to fulfil the public good, and then the government will leave it entirely to the BoE to create any additional real space required to fulfil those public projects.

    Which is as it should be. This ludicrous separation between the BoE and the DMO makes no sense once you understand how money works.

  6. “government to spend without rising public debt”

    It WILL rise public debt. But indirectly (bank credit held as a financial asset via the banks and the BoE) rather than directly (Govt bonds) . So really it hardly makes no difference at all. It’s just another way of deficit financing. Rather than indirectly funding the deficit by QE reserves. It will just mean not selling the bonds first and then buying them back.

    I try to explain to people that debt free money is impossible (nonsense). Any increase in a financial asset must be backed by a financial liability (=debt) held by another party. I claim that MMT clearly understand this point. Yet I read articles on this excellent MMT site that clearly contradicts this.

  7. “will leave it entirely to the BoE to create any additional real space required to fulfil those public projects!

    I’m unsure what you mean by this?

  8. “That Abbott & Co were going to try and discredit them is indicative of the puerile nastiness of that crew”

    You have to appreciate that they judge others by their own standards, If they were The Australian Bureau of Meteorology they would come to the conclusions that suited them and provide dodgy peer review like support for those conclusions. That’s the way they work so they assume everyone else is “at it” too.

  9. Great article as always Bill-

    I’d like to see this figure used more in relation to this excellent comment:

    “Thus, if there was an increase in availability of credit and borrowers used the deposits that were created by the loans to purchase goods and services, it is likely that firms with excess capacity will respond by increasing the supply of goods and services to maintain or increase market share rather than push up prices.”

    In the USA, the FRED graph Domestic Non-Financial sectors credit market instruments – Federal Govt credit market instruments gives us the broadest measure of private sector credit growth (bank loans, corp bond issuance, revolving personal credit like credit cards, etc etc):

    If you look at the chart in total adjusted dollar terms in the 2000’s, the private sector averaged roughly $1.5 trillion in new credit until 2008, contributing trillions and trillions of dollars in spending during the period and yet inflation averaged 2%. These are real numbers, not some crap mainstream Quantity theory bull@#$%. So if 10 years ago the economy was able to handle $2 trillion in increased spending per year (private sector plus roughly $500 Billion Govt deficit ) and that amount of spending was not enough to cause problematic accelerating inflation let alone hyperinflation. Why would $2 trillion in increased spending cause high inflation today just because that $2 trillion is now $800 Billion from the private sector and $1.2 trillion from the Govt instead of $1.5T private sector and $500B Govt?

    This stuff is not hard to find. Why dont these writers and economists look at the data? Or if they do look at the data, why do they ignore reality in favor of their theories. It mind-boggling.

  10. Dear Bill!

    In better textbooks we find three Theories of Inflation:

    – Quantity Theory of Money
    – Demand Pull Inflation
    – Cost Push Inflation

    – Quantity Theory of Money, as You wrote, was formulated in the 16th century and I think one reason this theory survived, was because David Hume backed it. But the whole situation since then changed. I totaly agree that this survival is silly.

    – Demand Pull Inflation
    As I understand, You think that this sort of inflation can occur. >Inflation is caused by total spending growing faster than the capacity of the economy to produce real goods and services in response.< I dont think this is true any more. We have free trade and open markets, GATT, WTO, a very good transportation- and informationsystem and so on. If somewhere in the world demand rises, all supplier in the world will supply. There ist no room for rising prices. (BTW: Isn't the idea behind Demand Pull Inflation and Quantity Theory of Money almost the same?)

    – Cost Push Inflation
    I think this sort of inflation is the only one, which remains possible in our world. Here we have to distinct:
    Rising commodity prices.
    Here we have to stopp speculation, for this is the most important cause of rising commodity prices.
    Rising wages.
    I think the only cause of an usual inflation today is a wage-price sprial. We had this in the 1970ies. So we need a wage policy, which follows the golden wage rule:
    Wage increase = increase in productivity + inflation target.
    With this we can stabilize aggregate demand which is sufficient for full employment. To reach full employment your MMT-Policy would be verry helpfull.


  11. The NIB is just a fancy title for a government agency and would be engaged in public spending – that is, in a fiscal operation. It would be spending out of some account the Bank of England created on its behalf and filled with numbers, presumably with many zeros after the first few digits.

    No, it is not. The NIB that has been proposed will be a bank, not a fiscal agency. It is to be modeled on the Nordic Investment Bank. It will make low-interest loans to worthwhile projects, not grants or purchases. That lending will be financed in the first instance by sales of bonds to the private sector, followed by central bank purchases of some quantity of those bonds. That’s classic QE. Basically Corbyn is proposing a Fannie Mae for infrastructure lending.

    It’s a good idea. It will keep infrastructure financing rates for identified projects very low; it will reduce the level of rent-taking it the infrastructure financing system; and it will help fight recessions by rendering infrastructure financing somewhat impervious to pro-cyclical fluctuations. How well it does these jobs depends on precisely how the central bank bond purchasing component is structured.

  12. “It WILL rise public debt.”

    It doesn’t. The liabilities of the UK central bank do not get included in the ‘public debt’ figure – only HM Treasury bonds.

    The liabilities go up, but not the debt.

  13. “I’m unsure what you mean by this?”

    The whole point of ‘interest rate’ targets is supposedly to manage the aggregate demand in the economy. Put interest rates up the economy ‘slows down’. Put them down and it ‘speeds up’.

    The philosophical difference is simple. Under neo-liberal ideology the private sector has access to all the resources and the government is just another ‘player’. The central bank sets its rates for the benefit of the ‘economy’, by which they mean their mates in the private sector. The government has to carve out space for itself by competing for resources. Hence tax and spend.

    Under a progressive philosophy the government has first access to resources for the required public purpose (this is required infrastructure spending and required public services). The private sector is then permitted to work with what is left and *central bank policy is set to allow them to do that*. The government then takes any resources the private sector chooses not to use and deploys them for the ‘nice to have’ public purpose (this is the Job Guarantee)

    So in the first philosophy the central bank ignores government and in the second it has to take into account what government is doing.

    When you hear central bankers complaining that OMF is ‘inflationary’ they are saying that they are refusing to adopt the progressive philosophy that allows government to have first access to a nation’s resources.

  14. “It doesn’t. The liabilities of the UK central bank do not get included in the ‘public debt’ figure – only HM Treasury bonds. ”

    My understanding is the UK treasury is not allowed to run a debit (overdraft) balance at the BoE. But if the rules are changed so that this is allowed. Then it will rightly be included in the ‘public debt’ figure

    If you disagree then where do you think this balance will be included So if this happens in the future and
    “The liabilities go up, but not the debt.”
    Where then is the debt going. Its a credit balance and it can’t go into revenue / RE. Its not SHFs. It will rightly end up as debt. And if the Govt tried to sneak a large BoE overdraft balance into a non Govt debt account the opposition would rightly kick up about the deceitfulness and dishonestly of the Govt.

    I still strongly believe that this statement is wrong “government to spend without rising public debt”
    and if it isn’t should not be supported in any way by MMT as it runs against honest reporting and sound accounting.

  15. Dear Dan Kervick (at 2015/09/26 at 0:44)

    I know you have invested time on this issue elsewhere and I don’t intend to get into a similar slanging match about this matter.

    But the matter does come down to whether the NIB is a loan-issuing agency exclusively or not. In all the Jeremy Corbyn literature and my personal contact with Corbyn-camp economists etc there is a strong inference that it will spend on public infrastructure development as well as do other things. Yes, the Nordic Investment Bank has been mentioned as has the LSE Growth Commission report in the some discussions as the NIB. But I have not read or heard a definitive statement that the NIB will be structured and operate like the Nordic model.

    The inference is somewhat different.

    In his major manifesto Jeremy Corbyn said:

    1. “Public investment in new publicly-owned infrastructure so that a future chancellor can deliver a sound economy, not just sound-bites.”

    2. “One option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects:

    Quantitative easing for people instead of banks.”

    3. “Another option would be to strip out some of the huge tax reliefs and subsidies on offer to the corporate sector. These amount to £93 billion a year – money which would be better used in direct public investment, which in turn would give a stimulus to private sector supply chains.

    These funds could be used to establish a ‘National Investment Bank’ to invest in the new infrastructure we need and in the hi-tech and innovative industries of the future.”

    That is suggestive of a spending function. It also casts doubt on your claim that “lending will be financed in the first instance by sales of bonds to the private sector”. Where does the tax redistribution fit into that?

    It is in that context that I wrote the sentence. If you have definitive statements to the contrary please share them (with appropriate documentation). I would guess you haven’t which makes your accusation a little ahead of itself.

    best wishes

  16. Where did you read about this “progressive philosophy”. It sound like something that economic thinkers who have too much time on their hands and are away with the fairies would dream up.

    Hopefully MMT stay grounded. We live in a huge potential, resource rich world due in part to massive technology improvements. Beliefs that are no longer appropriate and greed and fear are holding the West back. For example one flawed belief is that UK Govt debt is bad. It’s rubbish and dangerous nonsense and the opposite is the truth. Don’t try to work around this by say calling PQE debt free spending. Its not and is not only wrong but unhelpful and risky to do this. Confront the misinformation head on should be the main aim of MMT. Do not even partly buy into it. Challenge it as Auburn Parks has done above.

  17. I should not have to but I will qualify the following remarks by saying
    I think we should raise the minimum wage.
    Christoph Stein’s comment is very interesting.Once we get passed the household
    analogy and people except that most governments are monetary sovereign and
    cannot run out of their own currency their attention shifts to the inflationary fears.
    I think Christoph’s comments are spot on the only significant inflationary source
    is cost push inflation (this ties in with a sensible price theory of costs plus markup)
    Scarce resources( eg land) and wage rises are the real inflationary worries.
    Yet the central policy proscription of MMT is a universal job guarantee at a living wage.
    Currently certainly here in the UK an enormous amount of workers rely on state spending
    welfare to top up their incomes (yet still rely on food banks) . A living wage which is not
    Orwellian doublethink (or Osbournian double think) is substantially higher than the
    current minimum wage.Three decades of neoliberal assault on the Uk’s labour market has
    led to the loss of any perks ,job security and an increase in workplace bullying.For the
    private sector to compete it would have to pay significantly more than the job guarentees
    living wage .Prices would rise the living wage would no longe provide what it did a price wage
    spiral is the most likely result.
    From inflationary pressure , logistical pragmatics,undermining of the divisive debate about the
    deserving and undeserving poor I submit a universal citizens wage is the best way to eliminate
    non voluntary unemployment and begin to eliminate uneccesary poverty.In reality is an
    extension of existing progressive tax and welfare provision expanding the proportion
    of the population in the negative tax band.It is to some extent future proof the AI industrial
    Revolution is crucially different to the original one.These machines do not need human operators.
    THat is not to say I do not believe that the state should not expand its workforce.Vital work
    needs to expand in housing and construction,healthcare,education,mass transportation,
    the production of non co2 producing energy and scientific research in general.
    If demand pull inflation does become a problem a land value tax would be the best solution.
    I would also recognize the establishment of a healthy private sector surplus/savings
    requires government to provide inflation proof savings for citizens who are not currency
    issuers.Save or part save your citizens wage for a deposit for first time buyers or to
    supplement your citizens wage in retirement.

  18. Christoph Stein:

    “I think the only cause of an usual inflation today is a wage-price sprial. We had this in the 1970ies. So we need a wage policy, which follows the golden wage rule:
    Wage increase = increase in productivity + inflation target.”

    Wages chase prices not as you seem to presume increase prices through wage rises, although of course it increases inflation, wages in manufacturing are a tiny proportion of the actual production costs, real cost comes from the price of raw materials and energy which dwarf earnings.

    The other small factor you seemed to not to take account of was the quadrupling of Oil Prices throughout the Seventies.

  19. @Mervyn Hyde:

    Ok, I have to be more precise:

    The main source of rising prices in tradable goods is cost push.

    This has three elements: wages, raw materials and energy.
    Rising prises in raw materials and energy are one-time effects. I won’t call this >Inflation<. This is why I wrote "usual inflation". I doubt this was not precise enough.

    Inflation occurs when there is a self amplifying effect at work. With wage-price-spiral we have such a self amplifying effect. It is not the only one. I remember the 1970ies. My family had a little business than. As I remember in most contracts was a price-index clause. If prices surge, the contract-price rose up too. This, I think, was a self amplifying effect too. It worked similar the famous "scala mobile" in Italy or the "L'échelle mobile des salaires" in France.

    So I think the logic in the 1970ies was this:
    The rising Oil Price was the starting point and the self amplifying effects ("scala mobile", "price-index clauses") created the inflation than.

    Just I wrote about "tradable goods". I think this is important. We have to distinct. "Tradable goods" follow a different logic than "non tradable goods". It may be that in "non tradable goods" there could be "Demand Pull Inflation", but I am not sure.

    But I am sure that asset-markets follow a very different logik. In normal market demand will rise if prices go down and if prices rises, demand will go down. In asset-market the logik is just reverse. If asset-prices go up, demand rises. Thats it why we have these bubbles.

    So I think inflation is a very complicated thing. A lot of inflation is generated inside society. Neither monetary nor fiscal policy alone can do much about it. It needs a much broader approach.

    But today we have to fight deflation. The best to do this is: "Raise the wages!"
    So I agree with Kevin Harding.

  20. If you accept markup pricing then you reject general equilibrium. Without marginal pricing there is no mechanism to achieve general equilibrium. Without general equilibrium there is no general price level. If you reject general equilibrium then you cannot use the concept of inflation without associating a price variability measure. Without general equilibrium, variability and distribution are just as important as averages. The focus should be on living standards, not the average price of an arbitrary basket.

    Government needs to guarantee subsistence and then create a benign environment for production of other goods. If this is done then price changes will feel benign, unlike the great moderation where inflation was stable but inequality was increasing and living standards were falling for the majority.

    I do think there is value in understanding the inflationary period of the 1970s. There has been a lot of focus on public sector problems but there hasn’t been much attention to the collapse in private sector profitability which began around 1965 and lasted for two decades. This preceded the oil price shock and also any wage price spiral. Steve Keen suggested that Minsky moments can be inflationary. This is also implied by Keynes view of labour demand, which is now known to be only one of many possibilities.

    To condense this argument; if government spends money on something that is worthwhile then there will be a beneficial effect on the economy. The notional effects on supply and demand will be benign, even if the nominal effect is inflationary. We are in a deflationary environment. More spending is needed. Government can spend without borrowing. That argument is won. Therefore the focus should be on how government can spend effectively. To be effective, decisions must be distributed, transparent and democratic. That’s not so easy to achieve but there are some parts of government where this is already being done (e.g. education).

  21. Christoph: thank you I also agree with Kevin Harding.


    In line with your view that debt free money should be used to simulate growth, it also provides the essential assets of cost reduction, used wisely it could enhance cheaper procurement costs through centralised purchasing power, an idea being formulated here where I live between four local councils, sharing of personnel accounting etc., and other joint services.

    On a more global scale I would see innovation opening up on a scale never seen before, as I believe capitalism inhibits research and development. The NHS is an example in point, the interests of drug companies is to provide temporary relief as a benefit rather than an outright cure, as they want continual turnover of profit from sales, not a one off cure. Companies do not see peoples needs as their priority so much as maximising profit opportunities. Some drugs are currently not available due to prohibitive costs and judgments of worth, which if developed publicly with debt free money would never be an issue.

  22. @Hacky The Hufrex

    Yes, your assumption is true. I don’t believe in general equilibrium. I have never understood this mechanical dream. There could be very different subsystems in a society which follows different logics and none of them is ever in “equilibrium” in any meaningful sense, nore the society as a whole.

    So the government has to strengthen the weakest and shelter them from the strong. The strong can protect themself. Today politics does quite the contrary and this destroys the society.

    So I am with you: >Government needs to guarantee subsistence and then create a benign environment for production of other goods.<

  23. “In line with your view that debt free money should be used to simulate growth,”

    Debt free money is not possible. Money (bank credit) is a financial asset. Financial assets are always supported by a financial liability = debt (even if this debt is buried somehow in SHFs either direct or via revenue).

    I’m sure someone at some point in the past raised this possibility as a joke. Its a shame that many have fallen for it. Interest free money is possible. As is money backed by reserves held as an asset by a bank rather than bonds held as an asset by a bank. But all money is backed by debt. Otherwise it has no value.

  24. “Yet the central policy proscription of MMT is a universal job guarantee at a living wage.”

    Is it. Then this is a big mistake. It’s a stupid idea that will cause more harm than good. MMT should focus on correcting misunderstandings and possible ideas that could be implemented. One could be a guaranteed (low paid, meaningless) job for example. Another could be massive tax cuts. Or huge house building or investment in 4th generation nuclear. Or higher pension or benefits or increased benefits etc etc. But MMT should be completely neutral on all of these options. This is for the people and politicians to decide.

  25. “People except [accept] that most governments are monetary sovereign and cannot run out of their own currency”

    But people certainly do not yet. This is still a huge battle that must be won. Otherwise the future is grim. We need debt to back savings, money and company profits. And I do not see companies or individuals increasing debt to the required levels in future.

  26. RJ, MMT is a macro theory that attempts to achieve the goals of Full Employment and Price Stability.
    The current approach (NAIRU) look it up does not achieve this well. JG will be at the Living Wage.
    Secondly, in what way are JG jobs “meaningless”? JG roles are for the ” nice to have” public purpose, useful but not essential that uses a person’s *transferrable* skills to help them into a new role. For example, yu will have open source programmers working on projects, perhaps myself even. Are teacher’s aides meaningless? Is environmental work not “neutral”?

  27. “Another could be massive tax cuts. Or huge house building or investment in 4th generation nuclear. Or higher pension or benefits or increased benefits etc etc.”
    You can, to a point, but then spending will cause inflation.
    You significantly reduce current costs by having employers hire out of the JG pool, rather than the long term unemployed , allowing more priv sector employment for a given level of inflation.

  28. RJ I agree debt free money is an oxymoron .Yet an IOU from central banks whether
    they are nationalized like UK and Canada or not has collectivized IOU’s .
    The development of fiat currency has been a development of money as a token
    as well as an IOU.
    From the perspective of chartalism the accounting methods used to balance the books are
    irrelevant .As Bill always reminds us monetary swaps from account to bonds does not
    change the net monetary wealth of the private sector.
    Bob there is far to much vital work to do not to target new state employment .Teaching assistants
    and health care assistants could not just do vital work straight away but take part in
    work place training to expand the levels of trained professional staff.

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