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…
It is Wednesday – so just a few observations and then we get down a bit dirty (funky that is). Today, I consider the GND a bit, critics of MMT, Japan, and more. Never a dull moment really. I didn’t really intend writing much but when you piece together a few thoughts, the words flow and so it is. The main issue is the recurring one – the lets have a little, some or no MMT narrative. This misconception regularly crops up in social media (blog posts, Twitter etc) and tells me that people are still not exactly clear about what MMT is, even those who hold themselves as speaking for MMT in one way or another. As I have written often, MMT is not a regime that you ‘apply’ or ‘switch to’ or ‘introduce’. An application of this misconception is prominent at the moment in the Green New Deal discussions. The argument appears to be that we should not tie progressive policies (for example, the Green New Deal) to Modern Monetary Theory (MMT) given the hostility that many might have for the latter but who are sympathetic with the former. Apparently, it is better to couch the Green New Deal in mainstream macroeconomic concepts to make the idea acceptable to the population. That sounds like accepting Donald Trump’s current ravings about the scourge of socialism. It amounts to deliberately lying to the public about one aspect of the economics of the GND just to get support for the interventions. I doubt anyone who thinks democracy is a good thing would support such a public scam. And so it goes.
Macmillan publishers have made an extra 20 spaces available for the launch of our new Macroeconomics textbook in London on Friday, March 1, 2019.
The event will be held at the Springer Nature – Stables Building, Trematon Walk, Kings Cross, London from 17:00 to 19:00.
We have a guest speaker from Sandy Hager (City University of London). I will say a few words around 17:30.
You will need an entry ticket (free) to attend.
The first round of entry tickets were exhausted quickly and I realise several missed out who wanted to come.
So the first 20 to E-mail me will get the extra tickets. If you want to go get in fast.
I receive a lot of E-mail, particularly recently about whether we should tie progressive policies to Modern Monetary Theory (MMT), given the hostility that many might have for the latter who might be sympathetic with the former.
The idea of a Green New Deal seems to have become a case in point.
It is ironic because in the past various people have argued vehemently that we should drop the Job Guarantee from MMT and just concentrate on the monetary theories because the idea of a Job Guarantee is unacceptable to them but they would be conducive to supporting the monetary aspects.
The fact is that the Job Guarantee is central to the ‘monetary’ aspects seems to be lost by those mounting this type of argument.
But that is a reverse type issue to the one here today which says we should ditch the monetary aspects and just concentrate on the Green New Deal, embedded in a perfectly mainstream New Keynesian macroeconomic framework.
There are two issues.
First, the idea that the GND debate can be advanced by distancing itself from any reference to MMT shows a complete lack of understanding of what MMT is.
And anyone saying that should not be held up as a spokesperson for MMT.
In a fiat currency world you cannot have a little, some or no MMT.
I have stated this point often but it still seems to escape the attention of many critics (and second-generation MMTers, for that matter).
MMT is not a regime that you ‘apply’ or ‘switch to’ or ‘introduce’.
Rather, MMT is a lens which allows us to see the true (intrinsic) workings of the fiat monetary system.
It helps us better understand the choices available to a currency-issuing government.
It is not a regime but an accurate perspective on reality.
It lifts the veil imposed by neo-liberal ideology and forces the real questions and choices out in the open.
In that sense, MMT is neither right-wing nor left-wing – liberal or non-liberal – or whatever other description of value-systems that you care to deploy.
I mean by that, that while MMT provides a clear lens for viewing the system, to advance specific policy platforms, one has impose a value system (an ideology) onto that understanding.
To talk about MMT’s prescriptions is to reveal a lack of understanding about that distinction.
The point is that MMT is what is.
For example, Britain’s monetary system is governed and operates under the principles outlined by MMT.
It is not a matter of moving to MMT.
By eschewing the discretionary use of fiscal policy and imposing fiscal rules or by claiming it is okay to issue debt to ‘fund’ a GND, one is not exercising ‘non-MMT’ policy options.
The MMT lens allows us to tease out and more accurately predict the consequences of such a policy choice.
But there are no ‘non-MMT’ policy options. That is not very well understood.
So you cannot choose to have a GND with or without MMT.
The debate should be focused on what a GND means for real resource usage and what redistributions of access to real resources might be required to ensure that total spending (on the available real resources) can accomplish the GND goals without accelerating inflation.
Those redistributions of access is just another way of saying – if the current real resource usage is leaving a stock of free or underutilised real resources that is smaller than those required to effectively implement a GND – then the government has to increase that stock by depriving some of the current usages access.
One way to do that is through taxation – which reduces the capacity of the non-government sector to utilise real resources (by reducing spending capacity).
There are other ways including through regulation.
However, it is important to understand, that if taxes are raised to build a stock of free resources that can be then redirected into productive use via the GND, this has nothing to do with ‘funding’ the spending outlays that are operationalising the GND.
Once you fall into the ‘funding’ narrative you have left MMT thinking and gone back to neoliberalism.
The second issue then follows directly from this.
There has been another strand of argument saying that the GND can be ‘funded’ by government debt issuance because under current conditions (where the real interest rate is below the real GDP growth rate) the debt ratio will not rise inexorably and have to be reduced by higher future taxation.
That is pure neoliberalism (New Keynesian) thinking.
Public debt issuance doesn’t fund any government spending despite the accounting smoke and mirrors that might make it look as though it does.
The outstanding stock of public debt is just one non-government portfolio item that reflects past fiscal deficits. The government is, in effect, just ‘borrowing’ back some of the net financial assets it injected into the system through past deficits.
The accounting numbers that match the debt issuance do not ‘allow’ governments to spend. They just match deficits under current institutional arrangements where governments hang onto a convention that it will match deficits with debt issuance.
A totally unnecessary practice.
In the mainstream macroeconomics text, debt-issuance is held out to reduce the inflation risk of government spending.
That conclusion is also erroneous. The funds that are used by purchasers of government debt are typically held as part of their wealth portfolios. The debt purchases just change the mix of those portfolios.
The purchasers were unlikely to be making the choice: Will I buy a big boat or buy a government bond?
They were more likely making the choice: What is the best risk-reward for my current wealth portfolio which I am building up for the future.
And given the current banking system, the debt purchasers could still get their boat through access to credit.
So MMTers should never be on the ‘same page’ as the argument that talks about issuing debt to ‘fund’ the GND (because r < g) and holds out that it will reduce the inflation risk of the GND spending commitments.
Neither claim is true in a modern monetary economy.
And as for Paul Krugman! Where would one start?
On March 26, 2011, he wrote this Op Ed – A Further Note On Deficits and the Printing Press – which focused on MMT (one of his early attacks).
I considered that Op Ed in this blog post two days later – Letter to Paul Krugman (March 28, 2011).
It traced in some detail, Krugman’s evolving statements about fiscal deficits and public debt, including his disastrous misunderstanding of the Japanese situation in the 1990s, where he was throwing spurious advice around, right, left and centre.
Two days before the March 26, 2011 Op Ed, his article – The Austerity Delusion – probed the following issue, for example:
But couldn’t America still end up like Greece? Yes, of course. If investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt.
That tells you a lot.
There is a litany of similar erroneous comments throughout several media articles by the same author.
In the March 26, 2011 Op Ed he warned everyone that:
… running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation. And no amount of talk about actual financial flows, about who buys what from whom, can make that point disappear: if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base.
With the massive expansion of central bank balance sheets since that time and the fact (see below) that central bankers are losing their fight to bring inflation rates up – in Europe, in Japan, etc – the lack of wisdom from Krugman is obvious.
He then wrote (again attacking MMT) that:
As I understand the MMT position, it is that the only thing we need to consider is whether the deficit creates excess demand to such an extent to be inflationary. The perceived future solvency of the government is not an issue.
Quite apart from the misrepresentation of the MMT position, he was claiming that governments could become insolvent if they issued to must debt and that was something that MMT failed to acknowledge.
Okay, MMT does establish that a currency issuing government cannot become insolvent – in the sense, that it can always fund any outstanding liabilities in its own currency – unless it chooses for political reasons to default.
It could never justify such a political choice using financial logic.
But that is not the point here.
Fast track to December 14, 2017, and an interview that Paul Krugman gave to Ezra Klein for Vox – “An orgy of serious policy discussion” with Paul Krugman.
Ezra Klein asked him about the likelihood of an impending public debt crisis, given the increase in public debt over the preceding years.
Krugman replied as follows:
It’s very hard to try and tell a coherent story about how this alleged debt crisis can even happen. I’ve been through this. I’ve given presentations at the IMF, where I say, “Look, I believe for a country that looks like the United States, a debt crisis is fundamentally not possible,” and people will say, “Well, I can’t quite fault your logic here, but I don’t believe it.” It really is more about a gut feeling than it is about any kind of theory.
“fundamentally not possible”.
Then fast track to his latest attack on MMT (February 12, 2019) – What’s Wrong With Functional Finance? (Wonkish) – where he is back to making stuff up.
Things like “MMTers …. tend to be unclear about what exactly their differences with conventional views are”.
He hasn’t read much.
He also castigates the frenzied lot in 2010s who, in the face of the rising American deficits, used the “‘Eek! We’re turning into Greece!’ panic” to attack the federal government.
And refer back to Krugman’s own use of the Greek scare (see above)!
But the real point he tries to make now is that MMTs association with Abba Lerner’s functional finance is problematic because Lerner didn’t see that:
… debt potentially more of a problem than he acknowledges.
And then he gets into the ridiculous New Keynesian claim (as above) that debt sustainability depends on whether:
… the interest rate is higher or lower than the economy’s sustainable growth rate … if r>g you do have the possibility of a debt snowball: the higher the ratio of debt to GDP the faster, other things equal, that ratio will grow …
So when attacking MMT debt matters.
Otherwise a debt crisis is “fundamentally not possible”.
Consistency is a good thing.
I read a Reuters report earlier this week (February 18, 2019) – Architect of BOJ stimulus calls for big fiscal spending backed by central bank – that quoted the former Bank of Japan’s deputy government as saying that:
Japan must ramp up fiscal spending with debt bank-rolled by the central bank …
To stimulate growth.
The former Deputy Governor, Kikuo Iwata was the “architect of the BOJ’s massive bond-buying programme dubbed ‘quantitative and qualitative easing’ (QQE)” said that without stronger growth in household consumption spending, inflation will continue to “miss the central bank’s 2 percent target”.
I wonder whether ECB officials are taking heed!
Mr Iwata confirmed that monetary policy was no longer capable of any further stimulus in its own right.
The nation “must lean on fiscal policy by ditching this year’s scheduled sales tax hike and committing to boost government spending permanently with money printed by the BOJ”.
He said that:
Fiscal and monetary policies need to work as one, so that more money is spent on fiscal measures and the total money going out to the economy increases as a result … That’s the only remaining policy option.
He rejected a strategy that would rely “on commercial banks to lend more to already cash-rich companies”.
They are not going to spend (invest) even with cheap credit if the goods market is not more viable, which means household consumption has to be stimulated.
How might fiscal policy do that?
Well the ‘printing money’ terminology is incorrect. Governments do not spend by printing money. They credit bank accounts.
In this case, Mr Iwata suggested policies such as cash payments (and tax cuts) to “younger-generation households”.
If you think about this for a moment, his strategy would not constitute anything that is not already being done in Japan.
At present the Bank of Japan is buying up large volumes of Japanese Government Bonds in order to maintain long-term interest rates around zero.
Mr Iwata is suggesting, effectively, they keep doing this but in larger volumes, with one difference.
The current Bank of Japan management claim they are not directly backing government deficits because they are “bonds from financial institutions, and not directly from the government.”
In other words, they are buying them in the secondary market one the Ministry of Finance has released them into the economy via the primary issue.
This is the same ruse that the ECB uses to avoid admitting (the obvious) that they are funding government deficits in the Eurozone and thereby acting illegally with respect to the Treaty prohibition of ‘bailouts’.
The fact is that it is a fine line.
The primary dealers know that once they purchase the government debt in the primary issue they can easily off load it in the secondary markets at a profit because demand their is high courtesy of the central bank quantitative easing programs.
In practice it doesn’t really matter then which market the central bank purchases the debt – either directly or indirectly – the same outcome is achieved from the government’s perspective.
Mr Iwata is sharp enough to see through the official statements from his former employer.
He told Reuters that:
The term debt monetisation has been taboo in Japan. But in a way, Japan is already resorting to debt monetisation …
Not ‘in a way’. Pretty obviously that is what is happening.
What this effectively means is that fiscal policy should be further ramped up in order to stimulate aggregate spending.
Showing the way.
Oh, yeh. Time to get funky.
Here is one of my favourite bands (I have quite a few) – The Bar-Kays – from 1967 pushing it out with their song Soul Finger, which was their first hit released on April 14, 1967.
These guys backed Otis Redding and were closely tied to Booker T & the MGs – great DNA.
Several of the original band dies along with Otis Redding in a plane crash in Wisconsin on December 9, 1967. Only one of the band on the plane, the trumpet player, survived. Their bass player had taken another flight.
This track was also on their first album – Soul Finger.
And that was to soften you up …
This is a report I have produced in opposition to a profit grab by a developer in the little inner-city street that I live in.
Our community group has been attempting to block a massive development and so far we have around 65 objections formally lodged with the Development Application process.
We will probably be defeated such is the hold the developers have on council (and evidence in the past of kickbacks etc).
But we will go down fighting.
I am publishing it here because, while the objections have to be formally published on the Council’s Development Portal, for all to see, the Council is redacting information in the objections to stop the public knowing some key information – such as who is going to benefit.
At least this way, my research on that question and others, is in the public domain for all to access.
It is a shocking tale of micro neoliberalism.
Here is my objection: Objection Document.
I am in the process of setting up a 501(c)(3) organisation under US law, which will serve as a funding vehicle for the MMT Education project – MMT University – that I hope to launch early-to-mid 2019.
For equity reasons, I plan to offer all the tuition and material (bar the texts) for free to ensure everyone can participate irrespective of personal financial circumstance.
Even if I was to charge some fees the project would need additional financial support to ensure it will be sustainable.
So to make it work I am currently seeking sponsors for this venture.
The 501(c)(3) funding structure means you can contribute to the not-for-profit organisation (which will be at arm’s length to the not-for-profit educational venture) in the knowledge that your support will not be publicly known.
Alternatively, if you wish to have your support for the venture publicly acknowledged there will information presented on the Home Page of the MMT University to acknowledge that funding.
To ensure the project has longevity I am hoping to obtain some long-term support proposals.
At present, I estimate I will need about AUD 150k per year.
Note that most of these funds will support an administrative support staff (1 person fractional), data charges, and video editing and design staff (as needed).
I will personally take no payment for the work I am putting into the project nor will other key Modern Monetary Theory (MMT) academics, who have agreed to help in the educational program.
So I cannot do this without sufficient support. My research group does not have the financial capacity to support this venture.
I also do not wish to place advertisements on my blog posts.
Please E-mail me if you can help.
I have some funding pledges already but I am not near the target yet.
It won’t happen without the financial support.
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.