Flow-of-funds and sectoral balances

I have noted some misperceptions about the derivation, meaning and application of the so-called sectoral balances framework that is used in Modern Monetary Theory (MMT) to help explicate the relationship between the government and the non-government sectors. Some of this confusion appears to be the product of a deeper misunderstanding of the difference between stocks and flows and relationships between flows in economics. Those who conclude that this framework is really just an accounting structure are incorrect. Equally, those who conclude that the accounting relationships that are part of the sectoral balances framework are matters of interpretation are also incorrect. It should be clear that the sectoral balances framework combines accounting structures, which are derived from the national accounts framework used by statisticians to measure economic activity, and theoretical propositions, which seek to explain relationships between variables within the accounting structures. In other words, we need to understand both the accounting aspects that are true by definition as well as the underlying theoretical structures which drive the balances.

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Time for George Osborne to expand discretionary deficit spending

The British Office of National Statistics released the latest – Public Finance, October 2015 – last week (November 20, 2015), which showed that the British fiscal deficit has grown by around 16 per cent in the past 12 months and is around £2.2 billion higher than was forecast by those who care to forecast such things. The hysterical press reaction was quite amazing. For example, the so-called progressive UK Guardian described the results as “shock UK deficit figures” and said that the recorded deficit was the “worst … for six years”, despite the fact that any informed dialogue about fiscal balances would eschew the use of terms ‘worst’ or ‘better’ to describe such outcomes. Meanwhile, the US press went haywire with claims of a scandal of what effectively amounts to the government hiding revenue from itself. Quite amazing.

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Saturday Quiz – November 21, 2015 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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Friday lay day – The Stability Pact didn’t mean much anyway, did it?

It’s my Friday lay day blog and I am spending most of today reading French documents from the 1960s. The French theme is appropriate given recent statements by the ‘new Napoleon’ a.k.a. François Hollande this week about his intentions to ignore the rigid fiscal rules imposed on Eurozone Member States and expand the fiscal deficit to allow him to employ a significant number of extra workers in various areas of policing and security. While abandoning the “Stability Treaty” to use Hollande’s own words, by which he means the Stability and Growth Pact and its associated and pernicious fiscal rules and oversight, is an admirable display of leadership, the fact that he can only see to do this by engaging in more machinery to entrench the ‘war on terror’ more deeply is disturbing. It would have been much better if he just admitted that fiscal rules governing the Eurozone Member States are unworkable and prevent a government from fulfilling its responsibilities to advance the well-being of its citizens. He is now open to debate in France was the Conservatives who clearly favour more state police, security and military expenditure, such is their xenophobia, but are now demanding that such expenditure is done within the narrow limits of the fiscal rules and are therefore calling for reductions in spending on health and public services. I doubt that even this new Napoleon will be able to sale free of the fiscal straitjacket that is the Eurozone, major security threats notwithstanding.

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Australia – wages growth at record low as redistribution to profits continues

The Australian Bureau of Statistics published the latest – Wage Price Index, Australia – for the September-quarter yesterday and annual private sector wages growth fell to 2.1 per cent (0.5 per cent for the quarter). This is the third consecutive month that the annual growth in wages has recorded its lowest level since the data series began in the December-quarter 1997. In the 2015-16 fiscal statement, the Government assumed wages growth for 2014-15 would be 2.5 per cent rising to 2.75 by 2017. On current trends, that is highly unlikely to occur, which means the forward estimates for taxation revenue are already falling short and the fiscal deficit will be larger than assumed. Depending on how we measure inflation, the annual wages growth translates into a small real wage rise or fall. Either way, real wages are growing well below trend productivity growth and Real Unit Labour Costs (RULC) continue to fall. This means that the gap between real wages growth and productivity growth continues to widen as the wage share in national income falls (and the profit share rises). The flat wages trend is intensifying the pre-crisis dynamics, which saw private sector credit rather than real wages drive growth in consumption spending. The lessons have not been learned.

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Overt Monetary Financing – again

Adair Turner has just released a new paper – The Case for Monetary Finance – An Essentially Political Issue – which he presented at the 16th Jacques Polak Annual Research Conference, hosted by the IMF in Washington on November 5-6, 2015. The New Yorker columnist John Cassidy decided to weigh into this topic in his recent article (November 23, 2015) – Printing Money. The topic is, of course, what we now call Overt Monetary Financing (OMF), which simply means that all of the unnecessary hoopla of governments matching their deficit spending with bond-issuance to the private bond markets, as if the latter are funding the former, is dispensed with. That artefact from the fixed exchange rate Bretton Woods system is maintained as a voluntary procedure by fiat-currency issuing governments but only provides financial assets to the non-government sector in the form of ‘corporate welfare’. The debt issuance of debt has nothing to do with funding the spending and is used by all and sundry to attack such spending for creating so-called ‘debt mountains’. OMF brings together the central bank and the treasury functions of government into a coherent framework whereby the central bank merely credits private bank accounts on behalf of the government to indicate the spending initiatives implemented by the Treasury.

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Takahashi Korekiyo was before Keynes and saved Japan from the Great Depression

This blog is really a two-part blog which is a follow up on previous blogs I have written about Overt Monetary Financing (OMF). The former head of the British Financial Services Authority, Adair Turner has just released a new paper – The Case for Monetary Finance – An Essentially Political Issue – which he presented at the 16th Jacques Polak Annual Research Conference, hosted by the IMF in Washington on November 5-6, 2015. The paper advocated OMF but in a form that I find unacceptable. I will write about that tomorrow (which will be Part 2, although the two parts are not necessarily linked). I note that the American journalist John Cassidy writes about Turner in his latest New Yorker article (November 23, 2015 issue) – Printing Money. Just the title tells you he doesn’t appreciate the nuances of central bank operations. He also invokes the Zimbabwe-Weimar Republic hoax, which tells you that he isn’t just ignorant of the details but also part of the neo-liberal scare squad that haven’t learnt that all spending carries an inflation risk – public or private – no matter what monetary operations migh be associated with it. I will talk about that tomorrow. Today, though, as background, I will report some research I have been doing on Japanese economic policy in the period before the Second World War. It is quite instructive and bears on how we think about OMF. That is the topic for today.

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The massive Eurozone real income losses continue to mount

Eurostat released the third quarter National Accounts data for Europe on Friday (November 13, 2015) – GDP up by 0.3% in the euro area and by 0.4% in the EU28 – which showed real GDP growth slowing in the Eurozone (down from the slug-like 0.4 per cent) and nations such as Finland and Estonia (one of the previous ‘poster children’ for austerity) heading into basket-case territory. Finland contracted by a sharp -0.6 per cent in the Third-quarter 2015 and has been in recession since the Estonia contracted by 0.5 per cent as did the beleaguered Greece. Portugal stagnated at zero growth. The so-called European recovery is looking distinctly wan! As at the third-quarter 2015, the Eurozone as a whole as still not reached real GDP levels equal to the peak in the March-quarter 2008. The overall 19 economy monetary union is still smaller than it was before the crisis began some 7.5 years ago. But to envisage how large the losses are of the failure of the policy makers to quickly restore growth, we have to also estimate where the Eurozone economy would have been had the GFC not occurred and pre-GFC growth rates were maintained. Then we have staggering losses of national income to consider across the failed monetary union. A very damaging folly has been inflicted on the people of Europe as a result of the neo-liberal Groupthink that dominates policy making.

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Saturday Quiz – November 14, 2015 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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