The Weekend Quiz – March 31-April 1, 2018

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1. This week was a pretty easy one!

   Anyone for a comment on this one:

   Many marketcommentators in the US are right now worried that the Trump-deficit(i.e tax-reductions)will create negative competition between the selling of UST bonds and the private sector needed capital-financing. Knowing what government bonds really are make me feel very annoyed against MSM who lets these kind of facts rule.

2. Hi Bill,
   Thanks for all your work… Rest assured you are helping millions of working people to get to grips with economics and these weekend quizzes are a brilliant way to test if it’s sinking in.. By the way, any news on the MMT University logo competition??

3. Yep, that is the “Loanable Funds” scenario- there’s a certain amount of savings in the system and government borrowing soaks them up leaving nothing for private investment. Unless interest rates rise so that more people decide to save. People who hold this view do not understand that banks create money through loans and that prior savings are not necessary in order for them to do that.

4. Thank you Jerry,

   But I was also thinking about the easiest explanation! A government deficit created new money in the first place(i.e reduced taxes increased net savings in households and enterprises). So “taking them away” by selling bonds could not crowd out money for private investments, could they? No net change!

   In Sweden (not using the euro) we are obliged by art 104 Maastricht, in spite of a negative cb funds rate, to “finance” deficits all time by selling bonds. The cb or (Riksgälden) have to secure that the government “cashbalance” at the cb(or Riksgälden who handles government expenditures and loans) is always positive beyond an overnight-overdraft.

5. Half the battle is the tricky wording and shades of meaning.

6. Not forgetting reduced taxes can lead to positive dynamic effects meaning higher growth!? A growth financed by banks as usual!

   Critics maybe meaning that more government UST-selling during a falling market-liquidity(=slower growth, falling stockmarket etc means risk-aversion and higher marginal rates in some areas)means actors prefers UST´s on a margin as safe-haven? Maybe but anyway, nothing changes. No net change of money-resources per se. But as we MMT´ers know the private sector in aggregate will be granted new financial resources due to government deficits!

   Money held by big corp(like Apple)in tax-heavens are naturally already placed in mostly dollars(UST i.e) I suppose(studies found).

   If the owners move the ownership of these UST´s to us soil nothing happens really except paying off the one-off repatriation-tax as decided by Trump.

7. Yes Thorlief, a country that is sovereign (with respect to its own currency) does not need to issue bonds for any economic reason. But most countries impose constraints on themselves for political fears or reasons held by their own citizens. I’m sorry to hear that Sweden imposed these rules in order to satisfy the fears of other Eurozone countries, not their own citizens. That seems even worse to me.
   Anyways, a rule like that means that Sweden is not fully sovereign in its own currency. Until they decide not to follow the rule- that will happen someday, it always does.

   MMT recognizes that government spending comes first, that government spending creates money, and that tax collections or borrowing comes later, if at all. Even though it might look like the bond issues are funding the spending- they are by no means necessary for economic reasons (yes Francisco, they might be legally necessary if the government wants to follow its own rules.)

   Taxes definitely destroy currency. I think we could understand taxes as a type of financial crowding out in that they reduce the ability of the private sector to spend. I believe MMT holds that bond issuance, the way governments do that today, does not necessarily reduce the capacity of the private sector to spend- even short term capacity. That is because the bonds are transferable (they can be sold and that market is very liquid) and because they can be used as collateral for loans by banks and by individuals. So no crowding out of private sector spending by sovereign government bond issuance.

   But if a government does not issue its own sovereign currency, or tries to protect the exchange rate against foreign currencies, then financial crowding out can occur as the central bank raises interest rates to make holding the currency more attractive. So if Sweden is trying to keep its currency at a particular exchange value with the Euro then crowding out might be a possible outcome of deficit spending.

8. I would like to ask a question. In the UK at the moment there are criticisms of “Academy Schools” – one of these criticisms is that after privatisation, the new CEOs of the so called “trusts” are paying themselves exorbitant salaries (£150,000 – £500,000). One campaigner has said that if we want more money for schools, ie the service itself, we need to get rid of these largely paid CEOs. Nothing difficult about that, it is an old wisdom of the left, the euthansia of the rentier, as Keynes had said once, helps government bring about full employment or better services for all. I do not see this as an argument for taxes being needed for government spending.
   But I noted that someone who I know who follows MMT stated that this was not entirely correct, because government money is not a zero sum game. I criticised this, because although government can spend without limit, that does not mean that it should. Inflation can be a problem without redistribution, and that fat salaries can limit what is spent on services. Would you agree?

9. Sandra, what do you mean by “redistribution”? Usually people talk about redistribution as moving income from the wealthy to the poor. If that is the case then redistribution will be more likely to cause inflation than to solve it. The reason for that is that the poor typically spend a much higher percentage of their incomes than the rich, who save a higher share. So if you take money from a rich guy who might be saving it and give it to poor families who need to spend it you are going to increase total spending in the economy. And inflation is caused by excess spending- no matter who is doing the spending.

   As for the national UK government needing to tax well off school administrators in order to provide a first rate education to its residents- no it doesn’t need to do that. Although maybe there would be less political resistance to increased government spending on education if people didn’t have the impression that the CEO’s were raking it in at the expense of the public.

10. 3/3 this week.

    Thank goodness! Was losing faith in my ability to decipher Bill’s trickily worded questions that require forensic analysis.

11. Me too CS.
    The word “invariant ” had me reaching for the dictionary!

12. Jerry Brown 02:05;

    Jerry,

    All members of the EU have signed the Maastricht Treaty. Unfortunately the treaty involves the article 104 which restrict all members, euro-user or not, from creating money without selling bonds first. At the time no politician or journalist put this important subject at the newsfront. In retrospect I feel cheated on.

    The question remains. Can we as a “sovereign currency user”-nation(Sweden) renegotiate art. 104(above) or can we decide, if EU negate any negotiations, to do as we please without risking being put in front of the EU-court? I think it would be worth it because the article is going too far considering that “we don´t intend to” take on the euro.

    About crowding out effects:

    Let us skip the bank-sector and focus on the bondmarket and the perspectives of the bondissuer and the investor. Say the government issues a bond(before using this new money) at the same time as a private firm. Seen from the sellers point of view there is definately some competition(a limited market looking for opportunities/savings) between the two but more important, the investors have an objective. This objective is about risk and reward. Investing in GB´s is not about risk, it´s about saving risk-free. Therefore issuance of GB´s are not crowding out corporate bonds. To put it differently, it is about portfolio-composition from the eye of the investor.

    Another example;

    In Sweden there is some talks about investing in a new government owned superhighspeed railway connecting our 3 biggest cities. There have been proposals to finance this very big investment from the foreign currency markets(usd and/or euros). Why go abroad? Well I think it has to do with the volume. Credit-capacity is not big enough in our domestic markets! Already banks finance our “over-leveraged” housing in the foreign markets(and our cb has borrowed 100 Billion SEK in USD in case of a new financial break-down).

    There is no talk at all about depending on foreign money-markets. No talk about what a new financial crisis could do to our currency(which is freefloating but managed by cb-QE against the ECB-policies) and interest-rates. Also remember Sweden is very export-dependent and a weak currency has always been the policy of choice.

    In a negative rate environment(as we have) new money by the government could be an optimal way of financing such an investment. For the time being no bonds is needed to reduce bankreserves. Look at Japan as an optional alternative. Monetizing debts by the central bank. Japan is doing well and have been investing on a grand scale these last 15 years. But Japan has no article 104!

13. ThorLeif, MMT says that currency issuing governments should avoid debt denominated in a foreign currency. MMT also says governments should not have to borrow even in their own currency, but if for some reason they would prefer to issue savings bonds for their people, then they can absolutely set the interest rate on them at whatever rate they desire.

    So agreeing to article 104 is a huge mistake by the government according to MMT. It means Sweden is no longer a sovereign country that can implement fiscal and monetary policy for the good of its own people as needed in all circumstances.

    It also means that until Sweden rejects article 104, MMT descriptions of what is possible for a sovereign country do not fully apply to Sweden. Although I have no knowledge of article 104, aside from what you told me, I am confident that MMT theory would say Sweden should either ignore those restrictions or repudiate the agreement altogether. Your example of Japan shows why this would be better. And as soon as the article is repudiated, the Swedish government will have no problem financing that railroad or anything else that is for sale in Swedish Krona.

14. Jerry;

    We are in an agreement here. But you understand how difficult we MMT´ers have it here if our governments are tied up by EU-treaties(like a constitution). It´s hard enough to explain government is not a household or a corporation.

    Yes, we should be able to build a highspeed railway for what is for sale here(competence is here but resources are a bit restrained due to housing boom) but if we need to borrow first it could get tougher but it should not be impossible. Project should expand in steps. CB owns 30% of GB stock(QE) so there is maybe some kind of paper-deficit. And banks have lots of cb-reserves to use(reswap) as financing :)(Japan way) . The heart of our problems go back 25 years when Sweden turned to the neo-liberal path i.e not allowing government-deficits. Public infrastructure is really in bad conditions(demands much higher than supply) and we saw what was going to happen all the way back from the 90´s. And now we are 2 million more due to immigration. We are the second poorest country in west europe after Portugal(measured by median adults). Very, very few knows this. Government are afraid of popular(protests) right movements. The more afraid they go the worse things will get I think.