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…
This is Part 2 (and final part) of my series on printing money, debt and power. The two-part series is designed to draw a line through all the misconceptions and errors that abound on the Internet about the Modern Monetary Theory (MMT) treats deficit spending and bond issuance. The social media debate about MMT is at time nonsensical, thriving on falsehoods and fantasy. I get many E-mails after some robust Twitter exchange between some self-proclaimed expert who has found the latest fatal flaw in our work. Often these characters have just stumbled across MMT for the first time and, full of dissonance, wade into the discussion without thinking for a moment that we have been working on this Project for 25 or more years and, just may have, come across these points before. In other cases, the critics just make stuff up to make themselves sound erudite. In the process, well motivated readers get confused. In the first part I dealt with the ‘money printing’ story about MMT. Today I want to discuss the issue of bond issuance and whether MMT economists are Wall Street stooges who want to perpetuate the interests of the financial sector over all else. Seriously!
It is clear that governments do not have to issue debt in order to spend more in any period than they drain out of the monetary system via taxes and charges.
As hinted in – On money printing and bond issuance – Part 1 (August 26, 2019) – the only reasonable function that public debt might play is to facilitate central bank liquidity management (reserve management) – to offer the commercial banks an interest-bearing asset when there are excess (non-interest earning) reserves in the system, which would otherwise see the central bank lose control of any positive interest-rate target.
But that function can easily be achieved without any debt by the central bank paying a return on excess reserves in the banking system.
In fact, there is no functional difference between paying such a support rate and issuing debt.
So the excess reserves rationale is not necessary to justify the issuing of public debt when the currency-issuing government is clearly not financial constrained in its spending choices.
To really understand why MMT economists consider the issuing of public debt to be unnecessary, we have to gain a better appreciation of the implied short-term interest rate path that follows from the core MMT observations about the interaction between treasury functions and the monetary system.
More than 10 years ago, I wrote this blog post – The interest rate should be set at zero (May 4, 2009).
I followed it up with this blog post = The natural rate of interest is zero! (August 30, 2009) – where I examined the historical literature on this issue.
I argued (and cited the excellent 2005 paper from Mathew Forstater and Warren Mosler – The Natural Rate is Zero) that MMT economists consider monetary policy to be a poor tool for counter-stabilisation.
The neo-liberal (mainstream macroeconomics) position is that short-term rates should be used by the central bank to regulate spending such that inflation is held in check.
But monetary policy is a very poor way to regulate spending because it is what we call a ‘blunt instrument’. It has no targetting capacity in regional or cohort terms and so the central bank might hike rates to control an asset price boom say in a major city but this will also damage regional centres which may not be participating in the real estate boom.
But more importantly, it is not even clear that within normal rate bands the effect on spending is very strong.
Raising interest rates damages borrowers but advantages lenders. Rate hikes also disadvantage home buyers but advantage rentiers. There might be differential spending propensities between lenders and borrowers but the empirical research is not definitive on this issue.
The best guess is that the net spending impact either way is small and takes a long time to work its way out into the expenditure system.
Significantly, increasing interest rates to fight inflation in all likelihood pushes inflation higher as a result of the impact on business costs. So, self-defeating.
For all these reasons, monetary policy is not a very satisfactory tool for counter-stabilisation purposes.
Even the mainstream economists (Blanchard, Summers and others, including central bank bosses) are now admitting monetary policy has reached the limits of its effectiveness and fiscal dominance must become the norm.
That insight has always been a core MMT proposition.
The use of fiscal policy is superior because it is relatively direct – that is, the $s go straight into aggregate demand – after they are spent into existence by government.
Fiscal policy can also be targetted spatially and demographically to achieve various redistributive ambitions. It is also not revenue-constrained.
As a consequence, the ‘normal’ state of affairs will see fiscal policy aiming to eliminate any spending gap that would lead to a departure from full employment.
Deviations from full employment reflect failed fiscal policy settings – not a large enough fiscal deficit relative to the desire of the non-government sector to save overall in the currency of issue.
So a range of spending, taxation and other regulatory initiatives, will always produce fiscal deficits as the sustainable long-term position when the non-government sector desires to save overall.
Fiscal deficits add to bank reserves and create system-wide reserve surpluses. The excess reserves then stimulate competition in the interbank market between banks who are seeking better returns than the support rate offered by the central bank (if there is a support rate).
Without a support rate (or debt for reserves swap), net public spending will drive the overnight interest rate to zero because the interbank competition cannot eliminate the system-wide surplus (all their transactions net to zero).
So in pursuit of the desired policy goal of full employment, fiscal policy will have the side effect of driving short-term interest rates to zero where no support rate is offered.
Given that, we would always witness a zero short-term interest rate unless monetary policy intervention chose to do otherwise (either by providing a non-zero support rate on excess reserves or draining the excess reserves with debt swaps).
If the ‘normal’ tendency of a fiat monetary system is towards a zero interest rate then there is little logical sense in continuing to issue public debt.
Not issuing any debt doesn’t compromise the desirability of allowing fiscal policy to make all the counter-stabilising spending adjustments that are required to maintain full employment.
Note also that a zero short-term interest rate does not mean a static monetary policy – prudential regulation should be very aggressive to ensure the financial markets are serving the well-being of all and not becoming a casino for the speculators.
One thing I have also noticed is that some MMTers, who are being assailed by the ‘money printing’ nonsense, seem to become defensive and start claiming that MMT never said there should be no debt issued.
In other words, to placate attacks on political positions that they feel need to be fought or challenged they interpret the body of MMT literature in a particular way.
The statement that MMT does not advocate zero debt issuance is a wrong statement for two reasons.
First, it plays into the hands of those who think MMT is some sort of regime that would be dangerous to ‘switch to’ (I covered this issue in On money printing and bond issuance – Part 1).
Second, while MMT is largely agnostic about whether a currency-issuing government should issue debt instruments to match its fiscal deficits in one sense, the implication of advocating a zero short-term interest rate approach from the central bank, is that there would be no logical reason to issue such debt as explained above.
But why would an MMT economist be defensive about advocating no debt sales? Why would they want to give any ground on that issue?
Why would they say that no MMT economist has ever suggested the government terminate bond sales?
The latter point is clearly wrong.
In 2002, the Australian Treasury conducted a – Review of the Commonwealth Government Securities Market.
I wrote about that Review in this blog post – Direct central bank purchases of government debt (October 2, 2014) – among others.
The context was that the Australian government was retiring its net debt position as it ran fiscal surpluses and was then pressured by the big financial market institutions (particularly the Sydney Futures Exchange) to continue issuing public debt despite the increasing surpluses.
The contradiction in this position was extreme but not widely recognised.
The federal government was continually claiming that it was financially constrained and had to issue debt to ‘finance’ itself. But, given they were generating surpluses, then it was clear that according to this logic, the debt-issuance should have stopped.
Warren Mosler and I made a – Submission to that Review and argued that there was no financial reason for the Australian Government continuing to issue debt.
We argued in our submission that: (a) the benefits identified by Treasury which are used to justify the retention of the Commonwealth Government Securities (CGS) market can be enjoyed without CGS issuance; and (b) more importantly, these benefits cannot be conceived as public goods, and rather, at best, appear to accrue to narrow special interests.
We also argued that:
They appear to be special pleading by an industry sector for public assistance in the form of risk-free CGS for investors as well as opportunities for trading profits, commissions, management fees, and consulting service and research fees.
Furthermore, and ironically, their arguments are inconsistent with rhetoric forthcoming from the same financial sector interests in general about the urgency for less government intervention, more privatisation (for example, Telstra), more welfare cutbacks, and the deregulation of markets in general, including various utilities and labour markets.
We justified this conclusion by closely examining futures markets, the superannuation markets and related issues.
The continued issuance of debt despite the Government running surpluses was really a form of corporate welfare – to provide safe investment vehicles to private investment banks.
We argued that with a flexible exchange rate, where monetary policy is freed from supporting the exchange rate, there is no reason for public debt issuance to private bond markets.
In this context the real policy issue was how well the Government was performing relative to the essential goal of full employment.
Our argument was highly technical and based on the core MMT principles that we had developed (with others) to that date.
So it is simply untrue to say that MMT economists do not support the ending of bond issuance.
The reason some MMTers are now eschewing the line that Warren and I took many years is that they are trying to confront the ‘money printing’ narrative by holding out that they support the continued issuance of public debt.
And thus to suit perceived exigencies of the US political debate, there is a sort of revisionism going on about what constitutes the core body of MMT.
It is one thing for a person to say they possess an MMT understanding but also prefer (as an expression of their values) that governments issue a guaranteed annuity to allow financial markets to enjoy the corporate welfare.
But it is another to say that MMT recommends the issuance of such debt.
That is a conflation of the lens with values error.
If a student starts to study MMT from our new textbook – Macroeconmics – they will find that we argue that the base MMT position is to stop issuing public debt to match public deficits.
Further, trying to counter the MMT is inflationary scam arguments by assuaging readers with the idea that MMT advocates bond sales and eschews, so-called ‘money financed deficits’, is just playing into the mainstream myth that the inflation risk of public spending is reduced by issuing bonds.
We have written many articles and blog posts countering that argument, pointing out that the monetary operations that might accompany a fiscal intervention do not change the inflation risk.
Morevover, from a progressive perspective, the issuance of public debt as corporate welfare has significant negative consequences.
Why should the government sector be subdising risk-taking behaviour in financial markets?
Why would we support the government providing a guaranteed annuity to the financial markets?
And, finally, from a political economy perspective, the existence of public debt is used as a political weapon by conservatives to attack government action in welfare-oriented spending areas. The conservatives know that the public have a less than complete understanding of what public debt is and what are the implications arising from different debt ratios and play on the household analogy that rising debt spells trouble.
Why would MMTers want to play into that sort of brainwashing and political bastardry?
And that takes us on to the issue of power …
Claims that MMT ignores power also fall into the ‘confusing MMT with a regime’ class of errors.
An MMT understanding clearly provides for a comprehensive appreciation of the power of the currency-issuer to influence resource usage and control financial markets.
But broader discussions about the lobbying power of capital etc are not part of MMT.
Nor are the designing strategies for cricket coaches to win Test matches part of MMT.
Nor are algorithms to get a person comfortably to Mars and back part of MMT.
But to say that MMT as a body of work ignores something is also not the same thing as saying that proponents of MMT ignore that same thing.
This is where the US-centricity comes back in again.
The recent claims by the US commentator Matthew Stoller, who is apparently writing a book on Monopoly power, that MMT is about “money printing” and that MMT economists have ignored the “power” of financial markets is representative of this insularity and stupidity.
He wrote (in a recent Tweet):
Running interest rates at zero and using taxes to regulate resources is besides the point if you leave out massive speculation going on in derivatives markets. We have got to restructure the big banks and end this multi-trillion speculative nonsense
First, this sort of input perpetuates the confusion between the lens v policy application (based on values) distinction. Stoller clearly hasn’t divined that distinction because he hasn’t read much on the topic.
Second, he cited one of those ‘Marxist’ characters about the absence of power discussions and policy approaches to deal with global capital. This character is the one who only cites a narrow US-based MMT literature and then gets it wrong.
Had any of these characters really been interested in what core MMT economists actually write and had read a little more broadly than what they see on Twitter and a few antagonistic Op Eds they might have seen my relatively popular book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017).
The argument presented in that book, which is motivated by an MMT understanding and a Left value set, provides extensive analysis and a blueprint about a progressive strategy to deal with ‘power’ among lobbyists, financial markets, global capital and all the rest.
For years I have written about the need to eliminate financial market instruments that do not add value directly to the real economy.
I have advocated banning financial trading on food.
Forcing banks to be banks rather than casinos.
Nationalising banks and pension systems.
Invoking capital controls to prevent speculative currency shifts.
Tight regulation of product, financial and labour markets to ensure they serve public purpose (advance the well-being of the 99).
Abolishing the World Bank and the IMF and putting in place a multi-lateral institutional framework that will ensure countries with few available real resources can still move out of poverty and enjoy a secure currency.
All that was laid out in blog posts, academic articles and books including Reclaiming the State over several decades.
But then I am not an American author and so that literature doesn’t exist for these self-proclaimed experts.
We move on.
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.