British House of Lords inquiry into the Bank of England’s performance is a confusing array of contrary notions
On November 27, 2023, the Economic Affairs Committee of the British House of Lords completed…
Journalists have a lot to answer for in this modern era of constant media reporting across multiple modes of communication. I have previously argued that the trend has become one where journalists are used as broadcasting tools for press releases – that is, stories that appear to be news commentary are really just precised versions of some corporate press release or a statement from some right wing think tank. The lack of critical scrutiny where one line statements that on the face of it are highly contentious are allowed to ‘go through to the keeper’ is now the model for modern mainstream journalism. An example of this was the Australian Broadcasting Commission’s PM current affairs radio program last night (June 27, 2016) – Investors brace for another wild ride on international markets post-Brexit. The PM program is the ABC’s premier evening news and current affairs program where issues are meant to be taken apart and some so-called experts (from all sides) are meant to be interviewed so as to enlighten the public, who otherwise might be uncertain about the meaning and/or impact of some event. At least that was the intent of the program when it started many years ago. Now, it has become, like most of the ABCs current affairs reporting, a rather pale imitation of its original brief.
The issue discussed was as one might expect – what “the broader economic implications from the Brexit” might be.
One of the experts interviewed for the segment were Oliver Hartwich, a member of the Mont Pelerin Society who has worked in the Centre for Independent Studies (Sydney), a vehement free-market lobbying body that pumps out anti-government diatribes on a regular basis and advocates almost total deregulation of everything.
Another was a sharemarket trader and the other was a retired private bank economist Saul Eslake, who has long represented the interest of the financial markets in the media.
It was hardly a balanced panel of economists. So the ABC failed in its charter to present a broad spectrum of opinion in this segment.
But then we get into the actual Q&A material and it is easy to see the failure to interrogate the opinions, to test them for veracity.
The interviewer started by focusing on the sharemarket falls and depreciation of the pound since Thursday’s Referendum outcome in Britain and said that:
… if markets don’t settle down, University of Tasmania economist, Saul Eslake, doubts whether policy makers have the arsenal to deal with the consequences.
The economist Saul Eslake then spoke:
Policy-makers, governments, and central banks around the world have far less ammunition to respond to any such big falls in share markets than they had during the time of the global financial crisis because they spent almost all of the ammunition they had then preventing those falls from turning into a rerun of the Great Depression.
They succeeded in that objective, but they haven’t got much left in their lockers if the events of last Thursday turn out to have more far-reaching consequences for financial markets than they have thus far.
The interviewer didn’t stop to question the assertions here – they went out to the listeners as fact.
So here are the questions he should have asked.
1. What exactly do you mean by the term “ammunition”? Monetary policy, fiscal policy?
2. Is it not true that the RBA currently does not have zero interest rates, so it can cut further?
3. Doesn’t the Australian government issue its own currency? Doesn’t that mean it can purchase anything that is available for sale in that currency (AUDs) and that means all idle labour if it so wished?
4. How can a government that issues its own currency not have “much left in their lockers”?
5. Even if financial markets turn against government debt, why does the Australian government have to issue any debt, given it can spend without issuing it?
6. Even if the Australian government chose to continue issuing debt to allow the private markets to have a risk free asset to price risk off (that is, maintained the current system of corporate welfare), could not the RBA purchase all that debt and control yields?
7. Even during the GFC, bid-to-cover ratios on government debt auctions remained well above unity, which meant that more people wanted to buy the debt than there was debt to purchase. Why would that situation alter?
As I explained in this blog – There is no financial crisis so deep that cannot be dealt with by public spending – still! – the statement that – “There is no financial crisis so deep that cannot be dealt with by public spending” – does not mean that fiscal policy can bail an economy out of any problem.
As an aside, the title of that blog was the title of a paper I published in 2009 – you can read the Working Paper version for free (fairly close to the final publication). It reflects a basic insight that is derived from MMT once you fully understand that school of thought – its scope and its limitations.
When I say (and the other leading MMT writers say) – “There is no financial crisis so deep that cannot be dealt with by public spending” I do not mean the following:
What the statement means is that a situation can always be improved from where it is as a result of the operations of a crisis in the private financial markets.
It doesn’t mean the state reached after the fiscal intervention will be perfect. It means things can always be made better.
A nation has to ultimately confront its real resource constraints. Fiscal policy in the short-term cannot ease those constraints although it can ensure that the real resources available are utilised more fully.
A nation with heavy import dependencies (that is, real resource shortages) is also likely to suffer if its exchange rate collapses or world export markets for its goods and services slow appreciably. Fiscal policy can help to attenuate the losses but cannot ‘create food out of thin air’ like it can public spending capacity (money).
So in appraising what the statement means we should avoid setting up red-herrings or straw persons.
The bottom line is that a sovereign government like Australia can never run out of money and never needs to issue public debt as a matter of necessity. The public debt issuance is entirely voluntary and such voluntary actions have a habit of being quickly changed if they present too many ‘political’ problems.
It is thus a total lie to claim that a government will inevitably run out of domestic funding sources. All the discussions about AAA ratings are also irrelevant (and for Britain today given the corrupt ratings agencies have tried to steal some limelight and downgraded the rating).
Please read my blogs – Ratings agencies and higher interest rates and Time to outlaw the credit rating agencies – for more discussion on why the ratings agencies should be ignored in the context of public debt.
Ratings agencies cannot push up yields on government debt issuance unless the government lets them.
So what sense might we make of the assertion that Australia has “far less ammunition to respond” to a new crisis? Answer: no sense at all.
Whether the government has been running surpluses or deficits in the past is largely irrelevant to what it can do in the future?
Its outstanding liabilities (public debt) do not place any constraint on its capacity to spend. As we are seeing around the world, central banks can ensure interest rates stay low if they want which has the effect of dramatically reducing any interest payments on the public debt.
If you read Italian, this article is interesting – I tassi bassi della Bce e l’evoluzione delle finanza pubblica italiana. It shows how the low ECB interest rate environment has given the constrained Italian government space to maintaining spending even though tax revenue is falling because its interest payments have fallen dramatically.
The Australian government can always spend what it wants irrespective of whether it has been running surpluses or deficits in the past.
The deficits it created during the GFC after several years of surplus (with the result that private debt skyrocketed) do not constrain what it can do tomorrow.
Some might say – oh, but the politics are against higher deficits! Who says so? The current government won’t be voted out on Saturday (our next national election) because its has overseen higher deficits.
When it was in Opposition leading into the 2013 election it claimed Australia had run out of money and would soon be broke. That narrative soon ended when it took government. It is not dominant in the current election campaign.
The Labour government didn’t lose office in 2013 after introducing a massive fiscal stimulus in 2008-09 which saved the nation from the crisis. It lost office because of infighting and revolving leadership tussles.
So the politics can be spun to suit any outcome and if a major crisis was heading our way, the fiscal capacity could be unleashed in a blink of the eye.
When people say the government has run out of money and cannot afford fiscal stimulus, how do they explain the immediate spending that saved the banks in 2008-09? As Ben Bernanke said, the US central bank created the money out of thin air.
And so can any currency-issuing government if it desires.
So the claim that Australia has no further ammunition in a fiscal sense is a lie and the journalist should have brought that out in his interview.
On monetary policy, the interest rate set by the RBA is still above zero (1.75 per cent at present). So even if you believe in the effectiveness of interest rate cuts to stimulate demand, there is some room to go.
The reality is that monetary policy is not a reliable policy tool to use if one wants to stimulate effective demand.
The evidence over the last several years indicates that while central banks can always ensure there is sufficient liquidity in the banking system (reserves) to prevent any payments failures their impact on effective demand is weak and should not be relied on as the primary counterstabilisation policy tool.
This myth that a currency-issuing government somehow can ‘run out of money’ is also playing out in the Brexit commentary elsewhere.
The Fairfax press syndicated an article from a UK Daily Telegraph journalist today (June 28, 2016) – Brexit hardball: the European Union will treat Britain like Greece.
It is a bizarre example of someone who claims to be expert but is deeply ignorant of the key element that is necessary to establish his proposition.
Apparently, the EU mafia (Juncker, Tusk and co) will play hardball with Europe because the Greek experience last year taught the journalist two things:
… that in the cause of its salvation the European Union can be profoundly flexible and exceptionally brutal, and that events can swiftly take a momentum that is hard to control.
Okay, on the way Greece was treated we agree. It was “coup”. Greece is little more than a colony in receivership and its situation will worsen.
The journalist then speculates on what will become of the UK now that it “is almost certainly out the European Union”.
He claims that the Brussels elites “have been ready to say goodbye for a long time”, given Britain’s rather distant relationship with the rest of the nations.
They are now taking a cool, calm and collected approach to the excision. He speculates that while, according to the legalities of the Treaty, Britain retains full rights in the two year period while the exit is finalised, the reality will be differnt.
He thinks that the European Commission will rough-ride over Britain’s European presence (the insuffereable Jonathan Hill’s resignation being an example and Juncker’s demands that UKIP European Parliament members “pack their bags”) and things will get tougher not easier for Britain.
He argues that the European elite want to get rid of Britain as quickly as possible to head off other attempts within Europe to have membership referendums.
We can agree on that. The nightmare of their failed monetary system was already driving these exit movements. The empowerment of the British referendum will strengthen their demands.
But then we descend into the ridiculous.
The journalist writes that even though Greece made it “plain they wanted to remain Europeans”, which engendered some “goodwill”, they were still treated brutally by the establishment in Brussels and Frankfurt.
No such goodwill exists for Britain, now an ex-member.
So he think that:
1. “a Norway deal that means European Economic Area status, retained rights for the City of London and immigration – is almost certainly off the table”. Which I would count as a good thing. Norway pays into the corrupt EU but gets no say about its policies.
2. “clearing houses that trade in euros and generate billions for Britain will have to be domiciled in the eurozone”. Britain needs to reduce the domination of the City of London anyway. It needs to outlay speculative capital flows that do not help the real economy.
3. “Britain is not getting access to the single market” because Wolfgang Schäuble said “Out is out”. Well, I think Dr Schäuble will take advice from bodies such as the Bundesverband der Deutschen Industrie (BDI) which has already said that it would be counterproductive to block British trade access to Europe.
And, remember that Britain runs a current account deficit against Europe. I don’t expect any blocks to be put in place which would be any more significant than the 2 per cent tariff that the US faces. Trivial.
4. Exit “would likely result in a cut in GDP of six per cent and increase unemployment by 800,000, not including the risks presented by emergency spending cuts, or the “tipping points” presented by the crystallisation of financial stability risks”. None of which will remotely happen (there, that is a prediction) unless the British government abandons its responsibility to use its fiscal capacity.
And even the Tories in 2012, faced with on-going recession moderated their austerity ambitions and allowed the fiscal deficit to rise because they knew it would be electoral suicide to do otherwise (persist with their austerity obsession).
And the wrath that the Referendum has demonstrates exists in the poorer parts of Britain, which will further militate against any fiscal abandonment.
So where does the headline fit in? Just to scare people who might not otherwise appreciate that Greece is a small economy that uses a foreign currency controlled by the ECB, who abandoned its own commitment last year to maintain financial stability by acting on behalf of the Troika to threaten (blackmail) a weak Tsipras and his elitist cronies in Syriza to tow the line.
Britain is a large economy, with its own currency that floats on international markets and sets its own monetary policy.
It can ensure domestic demand maintains employment irrespective of any tricks the EU elites try out on trade. Not that I think the EU countries (particularly Germany) will entertain trying to block Britain out anyway.
The media has a lot to answer for in perpetuating these economic myths that help to sway public opinion away from sensible policy and help to create endemic uncertainty among households and firms.
The claims that the AAA downgrade in Britain is a sign of economic collapse is are wrong and the fact that the media do not question those claims and, indeed, give them oxygen, demonstrates my point.
Oh, for some journalists on our national broadcaster who actually know a bit and can force the politicians and commentators to answer questions that expose their underlying lies about economics.
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.