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…
There were two headlines on Australia’s national broadcaster, the ABC’s news site this morning that tell us that there has been little progress made in helping people better understand the way the monetary system operates and the capacities of the currency-issuing government within it. Both articles merely rehearsed the standard mainstream fictions, which makes them dangerous, in that they perpetuate the system that has held the world back from addressing its major challenges. By creating false ‘challenges’ and false ‘probabilities of crisis’, these stories delay action that is necessary to deal with the real problems of climate change, inequality, degradation of public infrastructure and services, the health crisis, etc
The other problem is that these ‘analysis’ columns pretend to be balanced with is a ruse to bestow legitimacy or authority on themselves. ‘Experts’, who are wheeled out to ratify the fiction, are just part of the Groupthink. It is a circular system of nonsense. Very disappointing.
I did an interview with the New York Times last week, which was part of a story – Why Japan Stands Virtually Alone in Keeping Interest Rates Ultralow – which came out on October 22, 2022.
Unlike most articles at present, this story at least tries to pursue some balance.
There is a lot of interest from the world press at the moment on why Japan is not falling into lockstep with the US Federal Reserve.
I have done a lot of interviews on the topic since I have been working in Kyoto.
I sense the press are getting a lot of commentary from mainstream economists which the journalists cannot square with reality – predictions of collapse of the Japanese monetary system and all the rest of it – the sort of nonsense that has been recycled repetitively since the 1990s.
And some journalists are reaching out to Modern Monetary Theory (MMT) to get a better, reality-based assessment of the situation which stacks up with the evidence rather than just repeating ideology.
More on that another day.
But, sadly, the Australian media is way behind.
One of the problems with this, and I have mentioned it before, is that the ABC commands massive influence in the information space in Australia.
Their platform is the only truly national platform and their ‘analysts’ are held out as balanced experts – delivering the state of the art to the population.
They claim to have no inherent ideological or political bias and are therefore to be seen as a ‘trusted’ voice in economic and political debate.
Who gets the platform significantly influences how the people view the political choices being made.
Unfortunately, in Australia right now, the narrative set by the fictions perpetuated by those with ‘platform privilege’ is disastrous for those who want to be able to assess the policy landscape.
The narrative pushed is all in one direction – austerity is necessary because the government might go broke and needs more ‘fiscal space’ if it is to invest in priorities.
In this article (October 24, 2022) – The government is sitting on (nearly) a trillion dollars of debt. How big a problem is it? – all the usual fictions are trotted out.
There is little knowledge being presented to the readership.
The journalist notes that the new Treasurer’s consistent claim that the government inherited a “trillion dollar debt” has given the government cover:
It has helped build a case for restrained spending and budget repair, offered as a key reason why the government cannot take up all sorts of ideas.
That is after all the purpose of creating the fiction in the first place – to constrain governments from pursuing agendas that might not serve the powers that be.
The journalist falls into line – claiming it “is undoubtedly a very large amount of money” – thereby giving credence to the notion that the public debt is a probem.
The logic suggests that if the debt was a small ‘amount of money’, then it would be less of a problem.
Of course, that would mean that the net financial assets held by the non-government sector in the form of risk-free government bonds – part of private wealth holdings – would be less.
That connection is not made.
We all pursue ‘wealth creation’, yet fall into compliance with government policies that destroy our wealth.
And, we don’t even know that is happening because journalists like this just propagate the fictions that mainstream economists have introduced.
If the government came into our streets and started pulling our houses down without compensation, there would be an uproar – wealth confiscation and all of that.
But they confiscate our wealth when they run government surpluses and reduce public debt and squeeze our liquidity options.
No-one knows what it going on – because they read articles like this one.
The journalist thinks he is adding balance to the story by qualifying the ‘very large amount of money’ using the gross-net debt distinction.
The reader learns that this technically is endorsed by “many economists” because the government has “cash it holds, deposits and loans it is owed”, which reduces the gross debt ‘burden’.
But it is still a ‘burden’ just a smaller one – that is what the reader deduces.
He then qualifies it further by scaling the ‘very large amount of money’ by the size of the economy to come up with the debt to GDP ratio.
Which leads to his conclusion:
It’s a big debt, but it’s not the biggest.
Okay, the next part of these types of stories, presents some table or graph comparing different debt to GDP ratios across the world.
Here things go really downhill.
The reader is confronted with a chart entitled “Global gross debt-to-GDP (% per cent)”.
And the chart reads in order:
So, my regular readers will then invoke the ‘this guy doesn’t know what he is talking about’ rule and stop reading the article.
Well the journalist wants the reader to think that Australia is not as ‘bad’ as many other nations because its debt-to-GDP ratio is much lower.
But everyone has heard of fallacies involved in comparing oranges with apples.
Nine of the 18 nations lists use a foreign currency and their debt, as a consequence, carries credit risk.
The nations are dependent on bond markets if they wish to run a deficit, unless the ECB buys the debt, which it has been doing.
One nation pegs to the euro (Denmark) and thus inherits the rigidities on government spending as a result.
The remaining countries issue their own currency and can always meet any liabilities that are denominated in that currency.
Comparing the two classes of nations in the same table demonstrates incompetence.
And that is a separate issue to the criticism that a table like this with just currency issuers included would be meaningless anyway.
And then the article wheels out the usual select group that gets the platform as the ‘expert’ – usually an investment banker or management consultant type.
This ‘expert’ ratifies the graphic:
When I look internationally, if you drill down and compare across developed economies who are similar to Australia, then that’s very much the case.
Apply my rule!
Then we get the rising debt issue given Covid:
Debt rose very fast with the cost of fighting the war against COVID …
But the article fails to mention that the central bank, a division of government, purchased almost all of the debt issued to ‘fight’ Covid.
So really the government just ‘loaned’ itself the funds, will repay itself, and then the interest payments in the meantime, will be paid to itself.
The old right pocket-left pocket trick.
What would the reader think if they knew all that?
Certainly, not what they think in the absence of that knowledge.
And finally, the article can’t help itself and invokes the household budget analogy:
As households face rising interest costs on mortgages, so too does the government face rising interest bills on its borrowings.
The ‘expert’ is quoted again as saying this means that we need to “think about whether or not it’s going to remain sustainable”.
When would it not be sustainable?
Meaning when would the government be forced to default?
So the whole tenet is implausible.
To which the article then wheels out a so-called progressive economist who reiterates the debt is “low by international standards” and just perpetuates the fiction.
It would not matter if the debt was humungous in the context of assessing whether it is sustainable.
There is no debt level that is problematic for the Australian government.
If interest payments, for example, started to add to much nominal spending to the economy relative to other things the government should be doing then the RBA can simply set bond yields to zero and eliminate the problem.
More effectively, the government could (and should) stop issuing the debt altogether and eliminate the corporate welfare system that feeds on the debt.
The other ABC article (headlined above) – Liz Truss could teach Jim Chalmers some lessons when it comes to tax cuts and structural deficit (October 24, 2022) – builds the related narrative that has returned to haunt progressive politics – that the ‘markets are in charge’ – as demonstrated apparently by the recent chaos in the UK.
This will haunt us for years and is akin to the ‘UK had to borrow from the IMF in 1976’ lie and the ‘Mitterand had no choice but to turn to austerity in 1983’ lie.
The journalist here thinks that readers will benefit from knowing that it is a problem:
… where the nation’s finances are permanently locked into ongoing deficits.
He claims that:
1. “We don’t generate enough revenue to cover our projected spending”.
2. “we will continue to spend more than we earn for at least another decade”.
1. Taxes have to rise.
2. Spending has to be cut.
3. Or continue to run deficits – which the journalist thinks is bad.
The UK ‘lesson’ is apparently that:
Denying the coffers that kind of revenue would blow out the deficit and would have to be funded by issuing extra debt.
What does “blow out” mean?
Fact: deficits are not funded by issuing extra debt.
The issuance is a political choice not a financial necessity.
The government could continue to run deficits for ever without issuing a cent of debt.
So the framing matters – the reader thinks the government is like a household as a result of this journalist’s output.
The reality is the output is a fiction and distorts political judgement, and, in turn, compromises the quality of our democracy.
I gave my version of the UK ‘lesson’ in this blog post – British currency gyrations are about weak government not fiscal deficits (October 17, 2022).
The ‘lesson’ is that:
1. The Bank of England dominates and can always control yields at whatever level it chooses.
2. The bond markets only have space if the government allows it so.
3. A divided government with incompetent leaders will also create uncertainty and chaos in monetary affairs.
It is sad that we have made no significant progress over the years, despite several intervening crises that have demonstrated why mainstream economic thinking is deeply flawed and inapplicable.
Paradigms shift slowly.
We just need to keep at it.
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.