IMF holds a religious gathering in Tokyo – to keep the troops in line

The IMF joint hosted a conference in Tokyo last week – Fiscal Policy and Sovereign Debt – and the continues its misinformation campaign on the ‘dangers’ of public debt. The conference claimed that it brought together ‘leading scholars and senior policymakers’ and upon examination of the agenda it was clear that there was very little diversity in the speakers. The organ started playing and all sessions sang from the same hymn sheet. That is how Groupthink works. Repeat and rinse, repeat and rinse, and, never confront views that are contrary to the message. Groupthink is about avoiding cognitive dissonance for fear that at least some of the ‘parishioners’ might lose the faith. The famous British economist, Joan Robinson likened mainstream economics to a branch of theology and these conferences that the IMF convene around the world are like evangelical crusades, to keep the troops in line so they can continue to keep all of us in line – for fear that we might all start seeing through the veil and discover the rotten core.

British economist – Joan Robinson – who was part of the Keynes group at Cambridge University in the UK, was a fierce critic of the neoclassical mainstream, which has morphed into the modern day New Keynesian macroeconomics.

In her 1962 book – Economic Philosophy (PDF version) – we read some of her best work.

It is a short book but worth reading if you get a chance.

On Page 122, she writes:

The neo-classical heritage still has a great influence, not only on the teaching of economics but in forming public opinion generally, or at least in providing public opinion with its slogans. But when it comes to an actual issue, it has nothing concrete to say. Its latter-day practitioners take refuge in building up more and more elaborate mathematical manipulations and get more and more annoyed at anyone asking them what it is that they are supposed to be manipulating.

In so far as economic doctrines have an influence on the choice of objectives for national policy, on the whole it is obscurantist rather than helpful.

And later, in closing (p.136) she wrote:

The solutions offered by economists were no less delusory than those of the theologians they displaced.

This was a continuing theme for her, and, for example, in 1936, she wrote in her short piece – ‘An Economist’s Sermon: Economics is the Dope of the Religious People’ – which was how economics is used as an ideological weapon to preserve the wealth and power of the elites:

But, if economics is the dope of the religious, the chief blame for the excesses of the drug addicts is to be laid upon the manufacturers of the drug the economists who have made it so fatally easy for the rich and pious to preserve an easy conscience by the sacrifice of their honesty of mind.

The Opening Remarks to the conference from an IMF official – Policy Challenges and Bringing Down Public Debt – exemplifies the sentiments that Joan Robinson was writing about.

IMF Deputy-Director Kenji Okamura, a lawyer, opened by asserting that:

Even before COVID-19, rising levels of public debt were a growing concern in many countries. But when the pandemic hit, public debts jumped significantly as governments provided huge amount of fiscal support to households and businesses …

High debt at a time of high interest rates means rising debt service costs that constrain fiscal space.

The situation is compounded by weak medium term growth prospects.

By the way, the position of the top IMF officials is not decided on merit but rather represents a political compromise between Europe, the US and Japan over funding formulas and senior positions.

The idea that high debt could constrain fiscal space is the classic fiction that the IMF use to justify austerity programs.

The mainstream narrative is that the government only has so much ‘money’ available, which is limited by how tolerant ‘taxpayers’ and ‘bond investors’ are to the current debt positions.

We are lured into believing that there is some point – a debt threshold – beyond which those tolerances will dissipate and the government will start finding itself unable to fund its spending programs and, ultimately, will encounter insolvency (and debt default) and chaos.

The threshold is always murky – rarely will any of these characters actually say a number – although the spreadsheet manipulators, Rogoff and Reinhart tried to assert a specific threshold before their fancy work was exposed as either incompetence or fraud or both, during the GFC.

So it is like some terror story – bad things lurk in the dark, be careful or they will get you.

We never know what they are or when they might strike but the fear is sufficient to keep us in check.

The fiscal space idea is allied to the fiscal sustainability narrative.

This is a major battleground for Modern Monetary Theory (MMT) which rejects the notion of debt thresholds and bond market revolts for nations that issue their own currency and do not borrow in foreign denominations.

A currency-issuing government is not financially constrained, so the question is then what should determine the level of government spending?

In MMT, the size of the fiscal deficit is crucial in advancing the well-being of the population while maintaining price stability.

We have a chapter devoted to this topic in our new book – Modern Monetary Theory – Bill & Warren’s excellent adventure – which clarifies the debate in some detail.

The concept of fiscal sustainability gained by understanding monetary operations is in sharp contrast to the way that prominent institutions such as the IMF, the World Bank, the OECD, and the major national institutions such as Treasury Departments – who show no understanding monetary operations – construct the concept.

For them fiscal sustainability is about not exceeding their presumed financial limits of governments, with narratives that concentrate on designing policy acceptable to bond market investors, in fear of presumed consequences.

For example, in the 2005 Finance and Development article – Back to Basics — Fiscal Space: What It Is and How to Get It – the IMF defines fiscal space as the:

… room in a government´s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability – making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt.

Underlying this approach is the flawed assumption that currency-issuing governments face the same financial constraints as households or businesses.

Once that fiction is adopted it follows that the government’s capacity to spend and service its outstanding financial liabilities is dependent on prior funding through tax receipts or bond market funding.

The fiction at the centre of these concepts of fiscal sustainability and fiscal space ignores the reality that a currency-issuing government is not revenue-constrained, and that therefore fiscal space cannot be defined in financial terms.

The capacity of the sovereign government to mobilise resources depends only on the real resources (labour, natural resources, productive capacity, and know-how) available for sale to the nation, with tax liabilities causing those things to be offered for sale.

Given that running out of money is inapplicable, defining the concept of fiscal sustainability with financial ratios (for example, public debt ratios) is likewise inapplicable.

The government’s responsibility is to use fiscal policy to pursue public purpose and well-being, which can include policies such as maintaining full employment and price stability.

The purpose of fiscal policy is not to meet some hard and fast financial target.

Rather it is to achieve functional outcomes in the real-world consistent with advancing well-being.

Which means that the IMF’s pretext for holding the conference is spurious.

Their argument is that if interest payments rise, then given the government has only finite ‘money’, its capacity to spend elsewhere becomes compromised.

An MMT analysis of the same fact – rising interest payments – would first of all seek to understand how much excess productive capacity there was in the economy – which is the actual determinant of the ‘fiscal space’.

Fiscal space is about real resource availability rather than any financial thresholds.

Should the economy be operating at full productive capacity and interest payments increase then the government has to carefully just the impact of those payments on total spending.

The goal is to keep nominal spending growth within the limits of the growth in productive capacity so as to avoid inflationary pressures driven by excessive nominal spending growth.

The government has several options should it find itself pushing nominal spending over the resource ‘space’.

It can cut back overall spending – preferably on military equipment.

Or, it can simply instruct the central bank to engage in yield curve control and control interest rates.

Or, and preferably, it can just stop issuing new debt.

The mainstream economists exclude these solutions because they want us to believe in TINA – austerity.

Furthermore, if the economy is operating below full capacity then those considerations are irrelevant.

The IMF official makes it clear what his agenda is:

Together, these factors mean countries are less able to meet rising spending pressures to address challenges such as climate change and aging populations. It also means they have less flexibility to respond to future crises and safeguard financial stability.

All conclusions here are incorrect, without adding the qualifications that I provided above.

Clearly, if we ignore the inflation ceiling issue, then governments have unlimited nominal spending capacity.

But that would not be a responsible position to take – unlimited nominal spending – which means the options I outlined above apply.

The IMF want people to believe there is some zero sum game always operating – or nearly always.

The situations where there is a zero sum outcome (in resource terms) are much less frequently encountered than the IMF would have us believe.

For the IMF official the options are:

1. “curb budget deficits—so building public support for these efforts will be vital” – in other words invoke the TINA mantra and scare the population into accepting outcomes that are unpalatable for their well-being without telling them that mostly these choices are unnecessary.

2. “strong oversight by independent fiscal institutions can help in this regard” – this is the depoliticisation strategy to render the TINA strategy less politically damaging. The government simply tells the people – it’s them not us forcing us all to cut back.

3. “the creditworthiness of the issuer comes into question due to too much debt, the funding advantage is reduced. So, running large deficits and debts because of the convenience yield can be a vicious cycle” – this comment was in reference to the public debt of the US government.

There is zero credit risk involved in US government treasury bond issuance.

The bond markets know that.

I know it.

Mainstream economists should know that and if they don’t they should quit and flip burgers somewhere and if they do then they repeatedly lie about it.

The bond markets also know that if the central bank wants to play them out of the market (that is out of yield determination in the auction process) it can – always, whenever it chooses.

So the idea of some bond market revolt creating a vicious cycle is impossible unless the government allows the crisis to happen, which it would not.

4. “many developed countries will have to confront the prospect of sustained deficits” – this was in the context of “aging and shrinking populations” and gives the impression that fiscal surpluses are the norm (the benchmark) and continuous fiscal deficits are in some way a deviation from the norm and a new world that has to be considered so that governments can “navigate this challenge”.

Check history.

Most governments run continuous fiscal deficits and surpluses are a rarity.

Australia has run fiscal deficits for 80 per cent of the time in the last 100 years or so.

Get used to that fact.

Music – Burning Spear

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

This song was from the first – Winston Rodney (aka Burning Spear) – album I acquired in 1977, the year after it was released in the Northern Hemisphere.

The album – Man In The Hills – was recorded at Randy’s Recording Studio and Harry J’s in Kingston, Jamaica.

It is one of the classics.

It was Winston Rodney’s second album and much more mellow than his first 1975 album – Marcus Garvey – which established him as a social commentator.

This song – No More War – continued that tradition and remains very apposite today, given the way the world has gone.

The players on this album were among the top reggae musicians at that time.

Among the lyrics we hear:

Everyday gone a fire …
Day and night bomb a explode (boom a boom a boom)
Too much youths a deh
Whose fight, it is a question I ask
Too much youths a deh
Whose fight, it is a question I ask

Can’t take it no more
Oh, war no good, no good, no good

While he was referring to young men (mostly) dying as a result of the urban violence in the ghettos of Trenchtown, one can easily extend this sentiment to what we are seeing every day in Gaza.

Why is the world tolerating thousands of children and youths being slaughtered by the IDF as part of a malevolent political strategy to save BN’s career and to delay his inevitable criminal trials?

I used to think the Holocaust during the 1940s was the worst thing I had ever learned about.

But I think the genocide in Gaza now is on that scale and it is almost unbelievable that the US and other advanced nations (including Australia) continue to finance and supply that murderous rampage against innocent civilians.

“Can’t take it no more” – indeed.

That is enough for today!

(c) Copyright 2024 William Mitchell. All Rights Reserved.