Dangerous anachronisms continue – and I am not talking about the British royalty

It’s Wednesday and as usual I just present some short snippets that have attracted my attention this week and other things that distract me from economics. Today, we don’t talk about the British royalty at all – the events this week were from another world really. But what is not from another world is the continual nonsense being spoken and written about this inflationary period and how central banks and treasuries have to tighten up to ‘beat it’. Talk about anachronism. And once we have discussed those things, I offer some soothing music to reduce the state of angst.

Talking of dangerous anachronisms

Sometimes amidst a lot of writing that seems reasonable, a statement comes out of the text that reminds me how far we have left to traverse in educating the commentariat on macroeconomic matters.

Martin Wolf’s current Financial Times column – The economic consequences of Liz Truss (September 20, 2022) – is a case in point.

He was speculating about the upcoming ‘mini budget’ that will be released on Friday of this week by the new British Chancellor.

He isn’t impressed by what he has heard so far from the Truss-Kwarteng team.

However, we continue to read statements like:

1. “deteriorating public finances could generate a crisis of confidence” – this is how the fictional world that mainstream economists have created leads to public panic over NOTHING.

What exactly are “deteriorating public finances”?

Well, for Martin Wolf and the rest of the mainstream commentariat it simply means a rising fiscal deficit.

So think about a situation where the government increases net spending (a rising deficit) and the extra spending increases employment in the economy, drives the unemployment rate down to full employment levels, increases the net financial wealth of the non-government sector, and, in the process builds some essential infrastructure or improves the education or health system.

Would you call that a deterioration?

You get the point.

In Modern Monetary Theory (MMT), there are good and bad deficits for sure.

The previous example is a ‘good’ deficit because it would be filling the spending gap left by non-government overall saving and ensuring there is high employment and excellent public services and infrastructure.

And in that situation, it would not matter how large the deficit was in relation to GDP.

The size of the required deficit would just reflect the extent of overall non-government saving that the deficit would have to ‘finance’.

Please read my blog post – The full employment fiscal deficit condition (April 13, 2011) – for more discussion on this point.

So what is a ‘bad’ deficit?

Think about a situation where the government thinks like Martin Wolf and embarks on an austerity program to drive the fiscal position back into surplus.

By withdrawing net spending, the government then causes the spending gap to widen, employment and output growth to decline, unemployment to rise and what do you end up with?

A fiscal deficit – sometimes larger than the one you started with.


Because the recession the government caused means employment is lower and that reduces tax revenue (because incomes are hit) and welfare spending rises (because there are more unemployed).

In that case, the deficit would not be ‘damaging’ per se but reflect the damaging policy position taken by the government.

It is that position that renders the assessment ‘bad’ rather than the resulting size of the deficit, which would just be reflecting how large the spending gap had become.

Martin Wolf then goes on to discuss Britain’s appalling business investment performance since the Thatcher years.

He writes:

Investment is the lowest as a share of GDP of all big high-income countries.

There are many reasons for this, including the stupidity of Tony Blair’s ‘light touch regulation’ that allowed investments to be diverted from productive capacity building to financial market speculation.

George Osborne’s manic austerity drive post May 2010 also didn’t engender confidence that expected sales would justify creating the extra productive capacity

Martin Wolf mentions Brexit but it is too early to tell what the impacts of that have been given the complications of the pandemic. We will get better data on the impacts of Brexit in the years ahead (I hope).

But then Martin Wolf writes this:

What is left is hard to do. To take one example: higher investment requires higher savings. From where are these to come?

In two sentences, he invokes the old loanable funds doctrine whereby a ‘funds’ market exists to distribute prior savings among competing investments, with the interest rate mediating the process.

This is another anachronism.

We know where savings come from!

As a famous Italian economist once wrote – investment brings forth its own saving!

Think about that statement – spending brings forth an increase in saving.


Spending creates demand for output, which creates demand for productive resources, which pays out incomes, and savings are a function of disposable income.

Increase national income and saving rises.

Simple as that.

Thus, saving is not required prior to investment spending the only constraint on the latter is the confidence that firms have that aggregate demand will improve in the future to justify their capacity augmentation.

And once the entrepreneurs are confident and resume spending saving will rise to match the injection.

Spending generates saving not the other way around.

Martin Wolf commits a basic error of reasoning because he obviously still thinks that saving and investment are determined in some loanable funds market and mediated by interest rate variations.

We jettisoned those notions in the 1930s as Keynes showed them to be deeply flawed.

The fact that these discredited notions have returned in the neo-liberal period shows how retrograde and backward this period of macroeconomic debate has been.

There is no finite pool of saving that different borrowers compete for and thus drive interest rates up when borrowing demands increase. ‘

Saving is a function of income which, in turn, is a function of aggregate demand (given available aggregate supply).

Bank lending is not reserve-constrained (loans create deposits) and so investment funds can be created for any credit-worthy customer at the stroke of a pen.

And bringing the first point back into the frame, we know that a rise in the fiscal deficit actually finances increased saving.

For example, if the household desire to save increases in response to rising uncertainty, the decline in aggregate demand would instigate a sharp contraction in output and hence income generation.

By increasingly filling the spending gap, the rising fiscal deficit can prevent the contraction from occuring and thus allow household saving to be higher than would otherwise be possible.

In that sense, the fiscal deficits ‘finance’ the private saving increase – by maintaining national income.

But there was some sensible commentary – sort of!

I rarely agree with the Sydney Morning Herald’s economics journalist Ross Gittins.

But his recent article (September 19, 2022) – Reserve Bank of Australia’s rate hikes raise risk of recession – contains some good observations.

1. “Our sudden, shocking encounter with high inflation has brought to light a disturbing truth: we now have a dysfunctional economy, in which big business has gained too much power over the prices it can charge, while the nation’s households have lost what power they had to protect their incomes from inflation.”

Yes, the neoliberal era shifted power and now workers struggle to maintain real wage levels (and are losing badly right now), while corporations plunder higher profits.

Then the central bank attacks the workers with interest rate increases to ‘fight’ inflation.

2. “It has also revealed the limitations and crudity of the main instrument we’ve used to manage the macro economy for the past 40 years: monetary policy – the manipulation of interest rates by the central bank.”

Monetary policy has always been a crude tool that relies on certain segments in the community changing behaviour when the cost of loans rises.

No central bank understands the distributional consequences of rising interest rates (creditors win, borrowers lose), nor do they understand the lags involved before behaviour changes, and, most importantly, they seem to misunderstand that when borrowing costs rise, corporations with market power (to push prices up) – push prices up and see their profits boom.

In that scenario, interest rate rises aimed at reducing inflation do exactly the opposite.

Which leads Ross Gittins to write –

3. “We’ve been reminded that monetary policy can’t fix problems on the supply (production) side of the economy. Nor can it fix problems arising from the underlying structure of how the economy works.”

As he notes, rising interest rates are designed to reduce spending – but only target the spending on the “biggest single item of spending: housing”.

Which means that:

… you realise the RBA’s plan to get inflation down quickly involves allowing a transfer of many billions from the pockets of households to the profits of big business.

A massive income redistribution exercise is going on around the world – in favour of the already rich.

Very little effort is going in to stop the corporations plundering profits.

Politicians have threatened windfall taxes but few have acted.

And the damage is being borne by low income households:

… it’s households that are picking up the tab for the RBA’s solution to the inflation problem. They’ll pay for it with higher mortgage interest rates and rents, and a fall in the value of their homes, but mainly by having their wages rise by a lot less than the rise in their cost of living.

That is the system we now live in.

It is dysfunctional from the standpoint of the overwhelming majority of citizens.

We should wake up to it and act.

The pandemic

I am pretty sick of so-called Leftists claiming that the responses of government early in the pandemic (restrictions, masks etc) were the product of some sort of corporate conspiracy.

They Tweet their heads off with self-reinforcing information that regularly misreports scientific research and claim that now the pandemic appears to be waning in its intensity that their position in advocating largely open slather was justified.

Nothing could be further from the truth.

We are still only one lethal variant away from disaster.

Sure enough, governments should have withdrawn patent protection and paid the vaccine companies at cost in the public interest.

Their failure to do that rewarded the corporations – I agree with that part of the criticism.

But reducing the infection rate was always a sensible strategy when there was endemic uncertainty and the experience of those nations that did have the most restrictive approaches was successful in that regard – buying time for the vaccine rollouts.

But the most significant reason why the Barrington crowd are misguided is that we still don’t know a lot of things about the pandemic but are slowly starting to find out very disturbing aspects that are related to the infection rates.

For example, this study in Nature Medicine – Long-term cardiovascular outcomes of COVID-19 – reported the research undertaken by Washington University academics in the US.

I won’t go into their methodology but it is largely sound – with well known limitations (that do not alter the gravity of the outcomes reported).

What they studied was the “post-acute cardiovascular manifestations of COVID-19” – so the effects on our hearts and cardio system post infection.

They found that:

… beyond the first 30 d after infection, individuals with COVID-19 are at increased risk of incident cardiovascular disease spanning several categories, including cerebrovascular disorders, dysrhythmias, ischemic and non-ischemic heart disease, pericarditis, myocarditis, heart failure and thromboembolic disease. These risks and burdens were evident even among individuals who were not hospitalized during the acute phase of the infection …

The risks were evident regardless of age, race, sex and other car- diovascular risk factors, including obesity, hypertension, diabetes, chronic kidney disease and hyperlipidemia; they were also evident in people without any cardiovascular disease before exposure to COVID-19, providing evidence that these risks might manifest even in people at low risk of cardiovascular disease.

The higher probabilities of strokes, heart attacks and heart failure found were not small relative to what happens without a Covid infection.


Because of the chronic nature of these conditions, they will likely have long-lasting consequences for patients and health systems and also have broad implications on economic productivity and life expectancy.

Their message to all of us:

… the best way to prevent Long COVID and its myriad complications, including the risk of serious cardiovas- cular sequelae, is to prevent SARS-CoV-2 infection in the first place.

None of the Barrington crew have Tweeted about this sort of research which is now starting to increasingly be made available as our data sets expand.

We will be counting the costs of this pandemic as societies well into the future and for individuals for the rest of their diminished lives.

Keep your mask on!

MOOC continues

MMTed invites you to enrol for the edX MOOC – Modern Monetary Theory: Economics for the 21st Century.

It’s free and the 4-week course starts on February 9, 2022.

Learn about MMT properly with lots of videos, discussion, and more.

Further Details:


We started the second week today but you can still catch up if you want.

This Friday there will be a two live events for participants, where I will tease out some issues with the ‘class’.

Music – Paul Desmond

This is what I have been listening to while working this morning.

This album from 1962 (I didn’t get it until the early 1970s) – Desmond Blue – was the first of many albums alto player – Paul Desmond – recorded for RCA Victor.

Paul Desmond had previously recorded with Columbia Records as part of the – Dave Brubeck Quartet.

While Paul Desmond is best known for his composition – Take Five – but he also wrote and recorded many excellent compositions with very lush orchestration.

This is one of them – Desmond Blue.

I don’t normally favour tracks that feature alto but this albim is one of my favourites.

Very cool.

On this track, you will also hear some of the ‘cool’ stalwarts in the early 1960s:

1. Jim Hall – guitar.

2. Milt Hinton – bass.

3. Bobby Thomas – drums.

4. Romeo Penque – woodwinds.

5. Gloria Agostini – harp.

6. Albert Richman – French horn.

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

This Post Has 10 Comments

  1. When slavery ended in Brazil, there was a labor shortage, for obvious reasons (in the XIX century, almost all work depended on people).
    So, how did land owners got workers to replace the former slaves?
    They hired poor people from far away countries (many from the ancient colonial power-Portugal), so as it would be impossible for them to return home.
    And then, they rented a shack to every working family on the farms – at exorbitant prices.
    They didn’t had the money, so the land owner would be a “good fellow” and it would be written down as DEBT.
    They sold everything that the farmers needed for living – at exorbitant prices.
    And more debt.
    So, a farmer would live all of his life working to repay a debt that was impossible to repay.
    Austerity was a way of life, because all income was gone to repay debt.
    Portugal had a public debt of about 75% GDP in 2008. It skyrocketed to around 130% of GDP after 2012. It’s 2022 and we still can’t repay it.
    Just like the XIX century, right?
    Inflation is a form of confiscation (sic Alan Greenspan).
    Today, I am getting less REAL income than I got one year ago, because of inflation.
    Where did it go?
    To the pockets of oligarchs (the land owners of the XIX century), that are selling me the goods and service that I need to buy.
    If I can’t pay, there are plenty of banks out there willing to loan me what they reckon I will need (no extra spending – auterity you know…).
    Many of the oligarchs (if not all), went bankrupted in 2012 – when they defaulted – and the government broke the law to bail them out.
    That’s how the debt skyrocketed.
    It was a distributional issue all along.
    It was a crime all along.

  2. I attended a lecture with Greg Jericho on inflation. I lasted all of 3 minutes before I exited the zoom. Greg discussed how inflation would:
    – reduce the debt burden
    – decrease the deficit
    – increases tax revenue

    notwithstanding none of the above impact the governments ability to spend, inflation has little to do with the causation of the above factors. The left has learned little.

  3. I believe you have not accounted for a significant cause for the increase in government debt when the government reduces spending. This will increase unemployment and when there is an increased chance of loosing your job you will reduce spending and save as much money as possible to cope will a possible redundancy. This will of course reduce tax and increase savings which will increase government dept.

  4. The Loanable funds theory includes bank credit. What you are really discussing is the real rate of interest.

  5. That card carrying austerian George Osborne knew precisely what he was doing in light of his expressed view “At the heart of almost all domestic political decisions are basic questions of who are you taking money from and who are you giving money to. That’s not really economics; it actually goes to the heart of how you organise a society … So, in the end I always thought of them more as sort of social judgements rather than economic judgements.” On the contrary, that really is economics because all economics practised by a government as monopoly currency issuer = politics, and politics is all about choices. How is it possible to separate economics from society?

    Perhaps when the people (notionally) in charge reveal themselves they should be believed. A problem seems to be that they mix up snippets of truth with the lie of their being doom and destruction problems for us all with public debt in a sort of Gish Gallop presentation that only allows the shock horror messages to cut through to the electors.

    Bill said:
    “No central bank understands the distributional consequences of rising interest rates (creditors win, borrowers lose), nor do they understand the lags involved before behaviour changes, and, most importantly, they seem to misunderstand that when borrowing costs rise, corporations with market power (to push prices up) – push prices up and see their profits boom.”

    The central banks may not know what they do (out of TINA ignorance?) but I don’t believe that can be said for their ultimate rentier neoliberal capitalist controllers (the metaphorical “Wall Street”) who have co-opted governments and their public agencies to do their bidding. Such has been facilitated via their industrial arm in the Military Industrial Complex and through financial warriors such as the IMF and World Bank. The DAVOS crowd come to mind as an exemplar.

    How is it that once it is understood that a currency issuing government, with the necessary available resources, does not need to make a financial profit for its survival, that it is not necessarily understood that such opens the way for the government to do things in the all embracing public interest, irrespective of any profit motive? Oh, that’s right, that would be socialism and we can’t have that when we have been placed on earth to feed the extractive capitalist machine.

    With that appreciation extant, voters/politicians could set out to choose to do whatever it takes to counter global heating within the limits of the available resources. Anyone with a modicum of scientific/mathematical training can only wonder how it became possible that economists were ever allowed to get away with the idea that externalities don’t matter to the unending wealth extraction from a finite planet?

  6. When are the times when the contraction of the fiscal deficit a good strategy then? At what point would this be an appropriate strategy in the UK?

  7. Replying to @Jengis
    It depends on the source of inflation. If a wage rise causes price pressures it is reducing the burden of past debt. That is a welcome source of inflation, and can cause no economic harm, except a little to currency hoarders who are not earning wages. On the other points that chap Jericho was barking mad.

    Thing is though, despite the highly regressive handling of the current supply shock inflation, wages should eventually catch up, and then past debt will be easier to erase.

  8. Replying to @’bob egnope’
    “Contraction of the fiscal deficit” is never a good strategy. Period. The Government deficit is an accounting residual, it cannot be targeted, and governments and central banks have no power to control the money supply, since banks are licensed to extend credit to any credit worthy borrower, and government welfare payments are non-discretionary.

    You know the government balance sheet for the year “is just about right” ( so either deficit or surplus, either) by counting the number of underemployed sustainable resources. If that number is positive the deficit (currency injection) was too low, if more resources were employed than are sustainable then the deficit (currency injection) was too high and/or improperly targeted (e.g. too much welfare given to people who were willing to work).

  9. …further reply to @Jengis
    My post above got cut! I meant to add that a huge problem with the current inflation era is that the poorer households are accumulating more debt today, meaning when wages do catch up (if they do) the past debt will be still easier to repay for any wage earner, but they’ve accumulated more debt meanwhile, so the debt relief effects of the inflation period once wages catch up will be largely negated, I suspect.

  10. “when [is] the contraction of the fiscal deficit a good strategy?”

    My guess has been that if the government can only provision itself by out-bidding private sector players, then it’s time to cut the deficit. If they can evoke more production at the same prices, then there has to have been spare capacity. Of course, they have to try before they can know, but I think that’s merely what reality is like.

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