I am covering a few topics today, given that I used yesterday's post space to…
It’s Wednesday and I have a lot on today. I was scanning some transcripts from the European Parliament today as part of a project I am embarking on to update my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015). I have had lots of requests (including from publishers) to provide a revised version to take into account events since 2015, include Brexit and the pandemic. So my head is back in transcripts, hansard reports, and other official documents to create the trail of evidence I need to make the continued case against the monetary union and the EU, in general. I report today on a particularly interesting exchange that appeared in November 2020 in the European Parliament. And then we have some great harmonica playing.
For the record – central banks cannot go broke
There seems to be a regular furphy cycle – you know, the repeating rehearsal of fiction inspired by the lies that mainstream economists allow to run rampant in the broader community.
It is a familiar pattern – lie constructed, financial media takes it up, news explodes for a week, an Modern Monetary Theory (MMT) economist points out the fiction, and then some mainstream economist, suffering from attention deficit, tweets that they knew it all along and it is part of mainstream theory anyway.
Then someone points them to what the mainstream teach every day in university programs, or something these economists have written in the past (regularly) or said to the media, and there is some further Tweet about MMT being a cult etc.
For years we have been observing this pattern.
Recently, we have seen the recycling of the ‘central bank will make losses’ myth as part of the mainstream attack on the large bond-buying programs that have allowed government bond yields to remain very low if not negative.
On Monday (February 16, 2022), the European Parliament considered the – ECB Annual Report – which is a regular event that apparently serves as accountability.
On November 19, 2020, the President of the ECB, Madame Lagarde met with the Committee on Economic and Monetary Affairs of the European Parliament.
The – Transcript – of the hearing contains this interchange.
An Italian right-wing MP, Marco Zanni from the Lega Nord, who previously worked for an Italian investment bank. From 2019, Zanni represented the right-wing ‘Identity and Democracy’ group in the European Parliament.
He asked the ECB boss this question:
…. In the past days, someone included the President of the European Parliament in starting to discuss about the possibility to cancel in the future part of the debt purchased by the ECB under its PEPP programme … I would just like to know, technically, what would be the impact of debt cancellation on the ECB and in particular if the related losses could harm ECB capacity in pursuing its monetary policy goals – if it would risk bankruptcy or if a central bank runs under different rules compared to private banks or other private companies? Can you also explain how and why the ECB, as stated several times by the bank itself, can work also with a negative equity? Is the ECB in some way a special institution?
So it was about the issue that if the ECB (or any central bank) makes losses on any assets it holds, including the vast quantity of government bonds many central banks now have in their possession, are they able to continue with negative capital.
I have written detailed analyses of this question in these blog posts (many years ago):
1. The ECB cannot go broke – get over it (May 11, 2012).
2. The US Federal Reserve is on the brink of insolvency (not!) (November 18, 2010).
3. The consolidated government – treasury and central bank (August 20, 2010).
Most recently, I demonstrated that an Australian Broadcasting Commission ‘expert’ journalist was misleading readers by beating up a story that the RBA might go broke.
For that blog post – When ABC journalists mislead the public and spread fiction (January 13, 2022).
Anyway, Madame Lagarde answered the question by claiming that under Article 123 of the Treaty, the ECB could not write off the debt.
I know, as I said, that there are limits in the Treaties, but it could happen in the future that, without formal cancellation of the debt, the ECB could incur losses related to its holdings under the asset purchase programme (APP). So I would like to know, technically, what would happen if those losses were to erode the equity of the ECB and how it is possible that the ECB could run also with negative equity.
Lagarde was then forced to the point of the question:
As the sole issuer of euro-denominated central bank money, the euro system will always be able to generate additional liquidity as needed. So by definition, it will neither go bankrupt nor run out of money. And in addition to that, any financial losses, should they occur, will not impair our ability to seek and maintain price stability. I’m afraid that it’s yet again a fairly simple, straightforward answer, but that’s the reality that we are dealing with, and I don’t speculate on alternative scenarios, because we have a treaty. We are the only issuer, and we are not at risk as a result.
Aside from the institutional references to the Treaty, that statement applies to all central banks that issue a sovereign currency.
They can never go broke and could operate without problems with permanent negative equity.
They are not profit-seeking companies owned by shareholders.
They are part of the currency-issuing governments (or in the special case of the ECB, the currency issuer in a system where the elected governments use the ECB’s currency).
So whenever you read a statement from a commentator that the central bank might make massive losses from its bond-buying programs, roll your eyes, and realise the commentator knows nothing about the topic.
Week 2 of our edX MOOC – Modern Monetary Theory: Economics for the 21st Century begins today
The second week’s material is now available in this 4-week free course. There is new material each Wednesday for the duration of the course.
Each week requires about 2 hours of participation for each student and so you can still catch up and enrolments are still open.
There is a large class undertaking the course so why not join them and learn about MMT properly with lots of videos, discussion, and more.
In the coming week, there will be the first of this year’s live interactive events, which adds to the material presented previously.
So even if you completed the course last year, these live events might be a reason for doing it again.
If you want to do the course, get in early as then you avoid having to catch up.
All are welcome.
Music – Slim Harpo
This is what I have been listening to while working this morning.
He wrote the song with – Jerry West.
I first heard the song while I was still at high school when my brother brought home a record by – Pretty Things – which they had released in 1965.
My memory tells me that it was on an EP that I heard the song, but the song was also released on their second studio album of that year – Get Thre Picture?.
I loved their sound.
In the early 1970s, I sought out Slim Harpo and have listened to him ever since. Research in those days was more difficult (no Google) so I had to track records down at two shops in Melbourne (Keith Glass’s import shop in Bourke Street and Batman Records).
Slim Harpo had the usual life – early tragedy, hard manual work and then his talen was recognised.
He died young (heart attack) and the world lost a major talent.
The British R&B bands of the 1960s covered his songs, including Rolling Stones (I’m a King Bee), Yardbirds, Kinks, Dave Edmunds, Them, etc
Fabulous musician and song writer.
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.