Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern…
The Weekend Quiz – September 8-9, 2018
Welcome to The Weekend Quiz. The quiz tests whether you have been paying attention or not to the blog posts that I post. See how you go with the following questions. Your results are only known to you and no records are retained.
Quiz #494
- 1. If yields rise on new bond issues then deficit spending by a currency-issuing government becomes more expensive.
- False
- True
- 2. In a fiat monetary system (for example, US or Australia) with an on-going external deficit that exceeds the public deficit (expressed as percentages of GDP), the domestic private sector cannot reduce its overall debt levels (by overall saving) without incurring employment losses and pushing the public deficit higher and the external deficit lower.
- False
- True
- 3. The imposition of fiscal rules which aim to limit the discretionary capacity of governments to net spend bias fiscal policy towards counter-cyclical responses when private spending is weak.
- False
- True
Sorry, quiz 494 is now closed.
You can find the answers and discussion here
One out of three! Number two right. Question three I misread, and can see where I was wrong now. Number one I think I took too literally.
Lance-when in doubt go for the counter-intuitive, unless Bill is using reverse psychology in the question!
These questions are great because they force us to see networks of connections rather than binary relationships.
I would be obliged if a contributor would help on an issue which puzzles me.
While not an expert on MMT I can see the logic in a currency issuing Govt controlling its economy via deficit spending to levels to ensure full employment via the Job Guarantee and controlling inflation using taxation to withdraw excess money from the economy.
What bugs me is the role of the private banking system, who will benefit from the confidence created by full employment.
They will again go on a credit creation binge and generate money from thin air ,leading to a crisis.
How is this assuaged by MMT.
Thanks in anticipation.
Salford Lad,
There are a few things that the private sector could do to ease the load on government.
1. Private banks could bring local knowledge to bear on local investment decisions. Projects in Wichita wouldn’t have to be judged and approved in Washington.
2. Private businesses could decide on resource use and production without involving central authority. How many shoelaces does society need? Spare the government that.
We don’t see this happening because the recent trend is for the private sector to become just as concentrated as central government would be.
1. Projects in Wichita have to be approved, or not, in New York.
2. Screw shoelaces. We’re going to make real money trading derivatives.
The dominating players in the private sector have become just as inflexible and (as the 2007 implosion showed) prone to runaway as any ruling clique could be, and just as insouciant (Paul Craig Roberts’ word) as any gang in Versailles.
So Modern Monetary Theory has built in to it the idea that the private-sector market could be good for something. We assume that money incentives can get the citizens to do something worthwhile. Worried and intimidated by the threat of having to plan a centrally planned economy.
Patrick Armstrong just did an essay on pluralism: What We Threw Away ()
Thank you Mel for your contribution, but on reflection on my own query I possibly see the answer. A punitive taxation policy on banks credit creation could control excessive irrational exuberance of the private bank credit creation.
All of course dependent on the political will and the danger of the undermining of the political system by the financial sectors main weapon of catering to greed.
Three out of three.
Boss mode.
Dear Bill,
The big Aussie banks are raising interest rates, citing “rises in wholesale funding costs”. I understand that banks will lend as long as they are confident the borrower is unlikely to default and that deposits do not “fund” the banks. So where does bank borrowing in the wholesale market (overseas I assume) fit into the equation?
Best Wishes
Barri
Barri, I’ve been wondering that myself. I’d love if someone would enlighten us.
Dear Lance and Barri Mundee (various times)
Please read this blog post – The role of bank deposits in Modern Monetary Theory (May 26, 2011) – https://billmitchell.org/blog/?p=14620
It should address your queries.
best wishes
bill
Frances Copolla says it best and saves you lots of time reading above post.
“Capital is about solvency. Cash reserves are about liquidity. Banks need capital in order to lend, or they risk becoming insolvent. Lending creates deposits, but not all deposits arise from lending. Banks need funding (liquidity) when deposits are drawn, or they risk running out of money. Funding is a cost. Therefore, lowering bank funding costs can encourage banks to lend. It does not mean that banks need funding in order to lend”
In short wholesale borrowing is a form of funding for banks. When wholesale costs rise they can either raise the price of new lending or accept lower profits. The response of the banking system depends on factors such as the availability and price of alternative types of borrowing and competitiveness.
Thankyou Bill. Not an easy read but I now understand.