As the inflation episode starts to abate, central bank governors have been keen to advance…
Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman
It’s Wednesday and I am somewhat besieged. So just a few reflections today before we delve into our latest music offering. I had an Op Ed published in the UK Guardian today (my time) which analysed the latest inflation scares that have been dominating the popular media. More and more mainstream macroeconomists are coming out and asserting that economies will overheat. The usual gold bugs have been delighted by this shift in the narrative back to the obsessions and manias that keep them occupied on a daily basis. What was interesting to me was the responses of the commentators to the Guardian Op Ed. If the sentiments expressed represent the state of macroeconomic knowledge (presumably mostly in the UK) then we have a long way to go before Modern Monetary Theory (MMT) and the sensible policies that it might inform gain any serious traction. Given the GFC, the stagnation in the aftermath, 30 years of Japanese history, the pandemic, which have all combined to demonstrate why the mainstream approach is dysfunctional and provides no guidance to what might happen in the real world, the commentators continued to rehearse these failed ideas about inflation, interest rates, bond markets etc. Quite dispiriting.
UK Guardian article
The UK Guardian published an Op Ed from me late yesterday (June 7, 2021) – Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman – which provides a different view to some of the inflation question that is occupying peoples’ attention at the moment.
There is an art in writing just 900 odd words and the author has to make every phrase count and become a container for implicit and sometimes very complex propositions.
One hopes that the curious reader will pursue some of these issues in more depth elsewhere if they are unclear what the emphatic point being made is.
The article attracted 451 comments before the moderator closed the commentary section off.
I read some of them and was astounded how many of them (probably the vast majority) had not taken time to read the words carefully.
There is scope for disagreement always.
But reconstructing what an author says to suit your own pre-conceived and factually incorrect version of reality is not particularly illuminating.
For example, I write:
Inflation ‘hawks’ claim that the large deficits and central bank bond buying (quantitative easing) programs – mischaracterised as ‘money printing’ – will deliver Zimbabwe-like outcomes. However, they just misunderstand how governments spend and are ignorant of the history of hyperinflations.
All government spending is facilitated by central banks typing numbers into bank accounts. There is no spending out of taxes or bond sales or ‘printing’ going on. All spending – public or non-government – carries inflation risk if nominal spending growth outstrips productive capacity. As full employment is reached, governments have to constrain spending growth and may have to increase taxes to curtail private purchasing power. But we are a long way from that point with elevated levels of unemployment and largely flat wages growth.
Many comments claimed that, of course, the central bank is printing money and that will devalue it because it will lead to an explosion in spending.
But the point I was making, which is intrinsic to some of the differentiating knowledge that Modern Monetary Theory (MMT) offers is that all government spending involves new currency entering the system.
There is no spending from taxes.
Or spending from bond sales.
Or spending from ‘printing money’.
These are the options that mainstream macroeconomics teach their students, which conveniently suit their framework, that is used to disabuse politicians and policy makers from running continuous deficits.
All government spending involves new currency entering the monetary system.
There is an inflation risk to that – but to gauge that risk we have to go beyond the monetary aggregates and explore the spending impact on real resource availability.
They also claimed that QE was printing money and would be inflationary.
I had written:
Mainstream economists claimed QE would result in an avalanche of bank lending and inflation. Modern Monetary Theory (MMT) demonstrates that QE involves central banks buying government bonds by adding cash to bank reserves. Bank lending is not constrained by available reserves – they are never loaned out to consumers. Rather, lending is driven by demand from credit-worthy borrowers, who are thin on the ground in deep recessions. QE reduces interest rates, by increasing the demand for bonds and driving down yields, which may have stimulated demand for equities, but have not pushed total spending beyond resource constraints.
But the commentators couldn’t get to parroting quantity theory of money quickly enough.
The QTM partners with the money multiplier to allow neoclassical/New Keynesian economists to claim that when bank reserves rise, broad money rises and inflation results from too much money chasing too few goods.
The causality is that broad money is driven via the money multiplier by the introduction of ‘high powered money’ or in this context bank reserves.
This is wrong on so many levels but the level of indoctrination that these comments reflected goes very deep.
First, when the central bank credits bank reserves in return for receiving bonds via the QE purchase, all that really happens is some numbers are shifted from one account at the central bank (public debt) to another (reserves).
The crediting of the reserve accounts do not involve any ‘money’ entering into the hands of the public (us).
It is fallacious to conclude that banks have greater capacity to make loans because their reserve accounts at the central bank have larger numbers in them.
Sure enough, greater reserve balances means the chances of being compromised on any particular day when the payments system resolves all the interbank transactions falls.
But that doesn’t increase the propensity or the capacity of banks to make loans.
That was the other point I was making.
Banks don’t loan out reserves.
They make loans when a credit worthy borrower seeks a loan. Loans create deposits and the liquidity is then available for spending.
Simple facts tell us that with the vast QE programs that the central banks have been running, broad money has not expanded anything like the expansion in reserves, and there is not a strong relationship between bank lending and reserve accumulation.
So the commentators can go on about ‘money printing’ for all they are worth, but they are just disclosing their own inadequate understanding of how the monetary system that they profess expertise in (which is why they make such assertive comments) actually works.
There was also commentary about housing price inflation.
I was writing about general inflation measures as captured by the standard CPI type measures published by the national statistician.
No-one is denying that in some nations housing has become unaffordable for many citizens because of the booms in prices.
That is definitely a problem but it is hard to directly relate this as a consequence for excessively expansionary monetary or fiscal policy.
More like the housing booms are being exacerbated by:
1. A lack of low income state housing being provided (definitely a problem in Australia) – this requires more public spending not less.
2. Tax structures that distort investment choices and bias savings allocations to speculative property market behaviour and away from productive asset accumulation.
3. Population pressures.
4. Poor urban planning frameworks adopted by nations, states and cities.
So the cure for an ‘inflated’ housing market is not to inflict austerity, which seems to be one of the suggestions that would satisfy the commentators, but to deal with the distortions and lack of public housing.
Anyway, there is a lot of work still to be done if the sentiments expressed by these commentators, who would seem to have a progressive bent (because they read the UK Guardian, notwithstanding the likely trolls), are expressive views and using analytical frameworks that are anything but progressive.
This is what I have been listening to while working this morning.
Lately, I have been digging deep into my archives – aka the boxes of records in the cupboard.
Today, we have the marvellous – Dave Brubeck Quartert – playing Koto Song.
The quartet is made up of:
1. Dave Brubeck – piano
2. Paul Desmond – saxophone
3. Eugene Wright – bass
4. Joe Morello – drums
The whole band has died now, but they left a fabulous legacy.
This note – Koto Song – provides background to what motivated Dave Brubeck to write the song.
It is essentially a 12-bar blues in C minor with lots of interesting deviations away from that “harmonic structure” that allows the improvisation to really fly.
The song appeared on the 1964 album – Jazz Impressions of Japan – which is one of my favourites.
It followed Dave Brubeck’s visit to Japan with his quartet and attempts to capture their impressions from that visit.
I don’t know if the album is still available but if you can get it then it is a treasure trove. This track was the most popular back in the US and elsewhere but other tracks on the album are worth absorbing.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.
This Post Has 35 Comments
There’s a profile of Boris in The Atlantic entitled “Boris Johnson knows exactly what he’s doing”
It’s definitely worth the time reading since it gives a view of the politics that Boris employs.
The two key points from that article I feel are:
– ideas matter because people believe them, not because they are true
– the zeitgeist is “the single most important factor in determining the trajectory of a nation’s politics.”
Boris is fundamentally a journalist and he knows that the story matters. The Robin Hood narrative binds because of the romance of the framing of that story. If you re-frame it as a lawbreaker who never bothers talking to the serfs to see if they want the sort of help proposed and is doing nothing other than maintaining and solidifying the existing feudal structures with his meddling rather than fixing the root cause, then it doesn’t sound anywhere near as good.
We need a story that captures the heart, not just the head.
MMT can guarantee that everybody always has a job to go to, but it can also promise permanently low mortgage rates – all with stable prices. Given the concern about housing expressed by Guardian readers: “your mortgage stays low with MMT” might be a better story.
Thanks Bill for your excellent article.
I woke up this morning and I only noticed then the article you wrote yesterday and more frustatingly, I couldn’t post a comment anymore….but I was able to read quite a few comments and I do agree, we have a lot of work to do !
The vast majority of commenters are far from understanding what MMT stands for and the lens it provides us to analyse macroeconomic policies and tp understand the money creation process. Ironically, these commenters probably do not bother reading publications of the BoE that would also question their understanding of QE, Money printing and even inflation (the current bogeyman for many but not really that of Central Banks at the moment).
Anyway, I was feeling a bit despondent after flicking through the comment thread but I try to remain upbeat as Bill has obviously hit a nerve :).
Have a nice day !
Just a curious thought. Has anyone asked these progressives where all the tax revenue is deposited? Is there a massive checking account at the Central Bank, or one at the Treasury? And as for bonds, how are these debts transformed into cash that can be used to pay the government’s bills. To which account is this credited. And the follow on final question. Why would you borrow when you create your own currency?
In the UK that is relatively easy to answer. Tax is collected and credited to an account at the Bank of England called the “General Account of the Commissioners of the Inland Revenue”. That is transferred to the Consolidated Fund’s Exchequer Account at the Bank of England as part of the overnight sweep and then onwards to the National Loans Fund Account.
(This is based upon the time honoured principle that nothing is true until officially denied – since HM Treasury refuse to tell us that what they do and when: “We consider that this information, crucially when combined with other information, could aid criminal intent against the Government’s banking operations and in turn prejudice the economy.”)
Gilt and Treasury Bill proceeds are credited to the Debt Management Account, where it is used to clear the overnight sweep balance in the National Loans Fund Account. Both accounts are at the Bank of England.
Governments borrow only in the sense of taking something with the intention of giving it back at some point in the future. It’s like borrowing a pen, when you have plenty of pens. It’s not for writing, but to relieve the other party of having too many pens.
Just in case they get hot.
“We need a story that captures the heart, not just the head.”.
If only that were possible.
I’m compelled by the evidence before me, to believe that a broad swath of society are essentially heartless and therefore not receptive to appeals to the heart; there’s nothing left to capture, if there ever was.
Neoliberal ideology was just the liberating force needed to free so many from any sense of obligation to society and to let go all empathy with others.
So much of modern humanity are tripping over each other in pursuit of personal gain, pet beliefs , pet causes, and are so disconnected from the kinds of relationships that once brought society together in defiance of those basic drives to make things work for everyone, that appeals for empathy now have very little impact.
We live in an era were many youth have been willing to throw the elderly under the pandemic bus to preserve their own freedoms, and I could go on to give other recent and equally disgusting examples, of mans inhumanity toward man; so what room remains for appeals to the heart?
I stopped commenting in the Australian edition of the Guardian almost two years ago. One of Bills ex-students also commented regularly on the economic articles of The Guardian.
One prominent commentator went back and counted the number of Guardian Australia commentators who, by their comments, demonstrated a grasp of the basics of MMT and how a national economy with a sovereign currency issuing government actually works. From memory he totaled 109 people who had a grasp of the basics. To myself this total represented 109 more people with a basic grasp of the real economy worked than at that time sat in the Australian House of Representatives and the Australian Senate.
This anecdotal evidence would suggest a slowly increasing number of the general public get it … but our elected representatives do not.
Britain is probably the same. There is also far more professional trolls from political parties and think tanks commenting in the UK Edition. Not to mention the activities of the 77th Brigade in social media platforms that people like Craig Murray suggest is happening all the time.
I’m not surprised the commentary feedback to Bills Op Ed were not all together accepting of the message with in the Op Ed. We can only hope the general public over there is getting the message.
Dear Bill, please do not be at all disheartened by the nature of BTL comments in the Guardian.
Starting, most likely, with Neil Wilson, there have been, over the years, a fair number of enthusiastic, MMT-aware BTL commenters at the Graun, myself included.
But after a while it becomes a thankless task, which, to be done properly, takes up an inordinate amount of time, and the real issue is that the opposing argument is put forward, not, for the most part, by genuine posters who have a misguided but innocent concern for not wasting “taxpayers’ money”, or for worrying about their grandchildren having to face the “repayment” of humongous amounts of National “Debt”, but by an implacable wall of (voluntary as well as paid) interns and employees of various right-wing, free-market think tanks, political parties, and pro-business organisations.
From the Taxpayers Alliance, Institute of Economic Affairs, and other Tufton St. based bodies – well funded by their American counterparties and billionaires – to the Conservative Party and its various right-wing funded think tanks, to the Institute of Directors, Chambers of Commerce, large Banks and wealth management companies; all of these organisations have very well funded Social Media departments, whose staff do not sit around all day looking out of the windows!
They are armed with dashboard software, which gives multiple “personality” functionality, designed to give the impression of grass roots support for their position, which in reality is pure sock-puppetry – just one operative can have dozens of avatars under their control, giving the false impression, with just a few employees or volunteers, that there are hundreds of supporters for their position.
This is what you are up against day after day; sometimes you begin to wonder if you’re the only genuine non-bot human poster in the comments section!
There are a few MMT proponents who are at it on the Graun, mostly new blood, but many of the older and better ones have simply abandoned the task, got banned, or like me, closed down their accounts because I decided to no longer provide free content for a publication that I have come to despise!
If there’s a wealthy person out there who’d like to fund an MMT Social Media department, equipped with the staff and all the same tools as its opposition (Warren, Stephanie?), then the BTL fight back could begin, but in the absence of that, the cause will unfortunately *appear* to be outnumbered on social media, even if in reality, its adherents are increasing in number.
Do not lose heart!
Best, Mr S.
Agreed MrShigemitsu. The Con tribe followed up with their below the line nonsense on Bill’s article by going straight on to comment on the other informed article of the day on overseas aid without any intention of addressing the issues. All go round liking each other too I should say. As you say, got to draw heart that there are readers who pause and think.
I sometime write comments to silly articles appearing in the (Toronto) Globe and Mail. It’s hard to say who among the other commenters is a troll and who is someone who hasn’t a clue or who just likes to expound on things they know nothing about.
I have been surprised that the Globe includes some of my more pointed comments indicating their staff writers have no idea what they are talking about. Perhaps it’s because I am always polite and refer to the author of nonsense as Mr. so and so who has failed to understand whatever. Of course what I am really thinking is “what a moron”!
“That is definitely a problem but it is hard to directly relate this as a consequence for excessively expansionary monetary or fiscal policy.”
I would agree that the four points you enumerated have contributed to the housing price boom.
But to imply that dirt cheap finance has no part to play is just plain silly.
And QE puts money in the hands of people that don’t need it. It is not spent on goods and services but in playing games in asset markets.
Dear Henry Rech (at 2021/06/11 at 8:29 am)
You missed the point – QE builds bank reserves. It alone does not put any “money” in the hands of the public. Bank reserves are never available to the ‘public’. Borrowing from banks who make loans which create deposits puts ‘money’ in the hands of people who then buy things including financial assets.
This is quite a separate process from QE.
If the central bank buys a bond from a private entity it exchanges that bond for money, money which the private entity now has instead of the bond. Yes? No?
This album along with nearly all dave’s work is available on Tidal
Henry, you should pay more attention to the weekend quizzes. Bonds are asset swaps, and do not increase net wealth. It’s like giving the bank a $100,000 bill and receiving 1000 $100 bills (or vice versa). If a private entity holds a bond, it has the money the whole time.
“Bonds are asset swaps, and do not increase net wealth.”
The thing about about a bond is you normally can’t go down the street and exchange it for a pair of shoes.
You can sell it for cash and then go down the street to buy what you want.
But the thing is that the people (or organizations) that hold bonds in any quantity don’t normally need to sell bonds to buy a pair of shoes. They are generally fairly wealthy.
So what do they do with the money? They look at their asset portfolios and decide whether they want the cash or want to purchase an asset. These days,with deposits yielding next to nothing, they are more than likely going to buy property/equities/gold/bitcoin or whatever takes their fancy.
Hence the property and equities booms we are seeing all over – and very low inflation.
Henry Rech (Friday, June 11, 2021 at 12:01)
If the central bank buys a bond from a private entity it exchanges that bond for money, money which the private entity now has instead of the bond. Yes? No?”
I have the same question.
“So what do they do with the money? ”
They don’t do anything with it. The people who were selling the bonds were selling anyway. They just do what they were planning to do with or without QE. Plans were not changed on the selling side.
It’s the people who were planning to *buy* bonds, but can’t because they were outbid by the central bank you need to concentrate on. Since at that point they were looking to buy safe government bonds, it is unlikely that they will either go out to buy a Ferrari, or plough it all into the latest crypto-fantasy. Instead they will go for the next safest option – keep it in the bank.
Remember the Keynesian view. Plans are made and then reality forces the plans to be altered. It’s who has to alter their plans because reality failed to deliver what they expected and what they alter them to that causes all the fun.
Central banks around the world have purchased trillions in debt securities, trillions.
Someone sold trillions.
What did they buy with the money? Shoes? I think not.
The money was probably mostly recycled into financial assets, hence the asset boom of the last decade.
QE was designed to fire up inflation and the real economy. It certainly has not fired up inflation.
All it has done is financed asset booms all over the place.
“All it has done is financed asset booms all over the place”
Wrong way to look at it. Interest rates *suppress* prices. Removing the artificial intervention merely returns assets to their price at the natural rate.
The money can’t go anywhere. Somebody has to hold it.
“The money can’t go anywhere. Somebody has to hold it.”
Yes. But it just keeps getting turned over until the music stops.
“But it just keeps getting turned over until the music stops.”
This is like a hole in my bucket.
“It’s the people who were planning to *buy* bonds, but can’t because they were outbid by the central bank you need to concentrate on. Since at that point they were looking to buy safe government bonds, it is unlikely that they will either go out to buy a Ferrari, or plough it all into the latest crypto-fantasy. Instead they will go for the next safest option – keep it in the bank.”
The music had already stopped…
There’s a hole in every bucket – the one at the top – I oughta know.
Anyway, you are saying what I am saying so I can’t see your point.
@ Keith Newman
I am a fellow Canadian who also comments fairly regularly on Globe and Mail articles (usually on the Friday and Saturday editions because I get delivery of those, but occasionally others) although with a different alias than appears here. I try to correct errors as best I can, but it’s an uphill slog against the misinformed and those purposely leading others astray (I’m looking at you, Fraser Institute, Montreal Economic Institute, University of Calgary and your fellow travellers) – but I’m not ready to give up just yet …
“Interest rates *suppress* prices. Removing the artificial intervention merely returns assets to their price at the natural rate.”
While physics can be reduced to elegant E=mc(2) style equations, economics, with psychologically unpredictable human beings at its core, cannot.
I think it’s too narrow to just say that low interest rates “return assets to their price at the natural rate”. There are other dynamics at work. In an environment of low interest rates where savers, like my 80 year old mom, can’t earn an income on their money anymore, they are now investing more heavily in assets like property and shares – driving up prices, putting housing out-of-reach.
In a truly civilised society, things must take their proper place. Housing is one of those things that has lost its proper place. It is treated and ruthlessly promoted as fair game for profiteering.
On close examination, Land is recognised as Providence. It was not created by man. Like air, water, and food, it is essential for life. For this reason, Land needs to be treated differently and fenced off from capitalism’s ‘animal spirits’.
Accessible housing is a foundation for dignified life and for human potential to flourish.
Any system of humane economics has to reflect this.
So, we need to clearly understand that without universally affordable housing, a fully functioning and vibrant society is impossible.
Values first. Theory second.
I do have a prob with ‘loans create deposits’.
The assumption is the lending bank has surplus reserves or other assets that can be sold and profitably converted to better assets through new loans.
Likely to be true most of the time.
But if the whole banking system is in ‘liquidity equilibrium’- I.e., liquidity and risk preferences are exactly reflected in their current asset mix, the only way the new loan can be made is if the central bank increases reserves by buying assets or some other credit facility.
The central bank is the final,ultimate arbiter of reserves.
We saw this in a different context in sep 2019 in the u S repo mkt when some banks couldn’t fund themselves and the fed stepped in with liquidity support for months predating the pandemic.
It was a case of less liquidity and more risk preference in the cornered banks but makes the point that the ability to lend depends on individual and system liquidity.
@ Glenn Crowther
“One prominent commentator went back and counted the number of Guardian Australia commentators who, by their comments, demonstrated a grasp of the basics of MMT and how a national economy with a sovereign currency issuing government actually works. From memory he totaled 109 people who had a grasp of the basics.”
For what it’s worth Glenn, the commentator you’re referring to there, Friarbird, now has over 250 people on what he has named ‘The List’. Although not earth shattering numbers, they are nevertheless encouraging.
@ bala srini,
Sir, pawnbrokers lend money that they already have.
Sometime in the past this was also true of bankers.
It is not true of bankers anymore.
In 2014 there was an experiment in Germany that proved Bill’s point, that banks really create money out of thin air with every loan. It involved a 200,000 euro loan by a German bank, while many gratuate students watched what every employee of the bank did as the loan was made. In no sense was the loan made by moving the money from some sort of account at the bank to the account of the borrower. Specifically, not from the banks “reserves” to the borrower’s account. The loan officier just added to amont of the loan to the account of the borrower.
“The loan officier just added to amont of the loan to the account of the borrower.”
What happened when the loan monies were spent?
What happens when the money is spent is exactly what happens when that borrower spends money that she earned by working and deposited to her account is spent.
That is, the bank pays the other bank the amount of the check, and deducts that amount from the borrower’s account. The 200K euros was actually moved to a different bank with a check, that that is what happened in when the check came in. If the money had not left the bank, the experiment would have prooved little.
All who doubt me can google it, It is not haerd to find. The BoE accepted it as proof, and then backtracked later [I assume under preasure]. You can google that too.
“That is, the bank pays the other bank the amount of the check,”
With what? From where?
Hank Rech and the rest of you guys – You just exampled just exactly what PROFESSOR MITCHELL talks about in this article – you read him and understand him in the context of prior things that you think you know. WHEN THE FEDERAL RESERVE BANK BUYS BONDS, IT BUYS THEM FROM ONLY A SMALL SELECT GROUP OF ENTITIES, THE PRIMARY DEALERS (MAJOR BANKS). THAT PROCESS INCREASES THE RESERVE ACCOUNTS OF THE BANKS. IN NO WAY DOES THAT AFFECT THE ABILITY OF THOSE BANKS TO MAKE LOANS. THE INCREASE OF RESERVES IS IRRELEVANT TO THE LOAN, OR CREDIT CREATION PROCESS. You should give Bill credit (lol) for being an Honest Professor of Economics, with a self congruent system of logic. The great majority of times, if you think you found a flaw (your ego), you probably misunderstand his thinking.
“IN NO WAY DOES THAT AFFECT THE ABILITY OF THOSE BANKS TO MAKE LOANS. ”
Where did I say that?
“THAT PROCESS INCREASES THE RESERVE ACCOUNTS OF THE BANKS”
A technical point.
Primary dealers can act on behalf of clients or as principal.
When they act as principal, they retain the funds from bond sale proceeds.
When they act on behalf of their clients, their clients eventually became the beneficial owners of the bond sale proceeds.
Monday, June 14, 2021 at 19:06
“That is, the bank pays the other bank the amount of the check,”
With what? From where?
Sir, sorry about the delay,
The bank takes the money from the account of the borrower and pays it to the other bank to honor the check that the borrower had written to pay some bill, for example.
Impossible comments under the article. Some good ones, but 99% knee-jerk return to orthodox drivel. Which is a clue as to just how deep this poison runs in public discourse. I read this further up in the comments here from Neil Wilson:
“We need a story that captures the heart, not just the head. ”
That’s exactly what someone said to me this very afternoon. He said what happens when you knock on the voter’s door, and they’ve been fed for a lifetime on slogans like: “taxpayer picking up the bill/theft from taxpayers”, “problem with socialism is you run out of other people;s money…”, “government interference in the economy”, “live within your means..” etc? It needs sharp demolitions to undermine these? It’s really hard because things worth knowing are beyond little slogans, which is why MMT on Twitter goes round and round and into a vortex.
There are ones you can take on and repurpose, like: ‘no borrowing for day-to-day spending’, obviously because the government doesn’t ‘borrow’, so these can be easily dispatched. It’s more than this though, people have spent a lifetime knowing what they think they know and who wants to stop and say: “I’m wrong”? Very few. And as MMT proponents do we not all say things like “it’s contrary to intuition but…”? This is a great stumbling block. Exhausting.