These claimed essential fiscal rules in the UK seems to be disposable at the whim of the polity

Regular readers will know I have been a long-time critic of the fiscal rules that successive British governments have invoked as part of a pretence that they were being somehow responsible fiscal managers. The problem was that in trying to keep within these artificial thresholds, governments would do the exact opposite to what a responsible fiscal manager would do, which is preserve the integrity of public infrastructure, ensure public services reflected need, and steer the nation in a direction where it was able to meet the challenges that beset it. This period of ‘fiscal rule’ domination has been defined by relentless fiscal austerity and a degradation of living standards as successive governments pursued the neoliberal agendas. Now, it seems the British Labour government is finally realising that it cannot achieve its aims while retaining the fiscal rules they so tenaciously claimed were essential. Back when John McDonnell was the shadow chancellor I told him the rules were unachievable given his policy ambitions. His support crew – academics and apparatchiks vicariously slandered me for running that line. They were wrong and the current decision by the Chancellor to alter the rules proves that. But it also proves how ridiculous these rules are anyway.

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The EU is in terminal decline

Some Wednesday snippets. First, I juxtapose the political machinations that the EU President is engaged in to consolidate and expand her power within the European Commission with the reality that Member State governments are becoming dysfunction because social instability and political extremism are rife. Then I reflect on my experience as Chancellor of Britain – a great success I should say, although I was told I had broken all the rules. It tells one how stupid the rules are. Then, finally, some music to enjoy.

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The British government does not have to appease the financial markets

Sometimes one journalistic piece captures the problem facing those who are trying to change the economics narrative and promote an alternative framing that is ground in the reality of the system rather than one that serves to reinforce the dominant ideology of the elites. The opinion article by Larry Elliot in yesterday’s UK Guardian (October 13, 2024) – Labour’s challenge is complicated by the triumph of finance. That’s bad news for UK plc – is one such article. It summarises how far the progressive debate and the British Labour Party has become trapped by fiction. It demonstrates clearly how if we start off assuming that there is a rigid constraint on decision-making then the bind will lead, invariably, to poor decision making because the opportunity set is so artificially limited by the starting assumption. I am amazed really that progressives in Britain (and everywhere by the way) still adopt this flawed framework for debate and decision-making. So let’s work it out properly.

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More misery and dysfunction coming for France – as the fiscal rules bite

For all those Europhile progressives who have held out that reform is the way to deal with the neoliberalism of the European Union and even, in some cases, claimed that the austerity mindset was over (once the fiscal rules enshrined in the Stability and Growth Pact were temporarily suspended during the pandemic), the behaviour of the French government should wake them out of their delusional reverie. The new Prime Minister addressed the National Assembly last week and outlined a new fiscal direction involving significant expenditure cuts and tax hikes. His plan will not satisfy the European Commission, however, who under the Excessive Deficit Protocol (EDP) have indicated they want a faster transition back to the fiscal rule thresholds (that is, even harsher austerity than Barnier is proposing). This policy shift is in the context of an elevated unemployment rate (which is rising) and an already significant output gap. The austerity is likely to push the unemployment rate towards 9 per cent (around) and will be a disaster for the prosperity of the French people who are still enduring the cost-of-living fallout from the pandemic and the Russian-Ukraine situation. Add in the possible impacts of the Middle East crisis and we have a failed state. Once again the fiscal rules defined within the EMU architecture are going to deliver shocking outcomes.

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IMF surcharges cripple the poorest nations and transfer wealth from the poorest to the richest nations

I am now working in Kyoto again and have a full day’s commitments ahead of me. But as part of my on-going research I have been investigating the conditions under which the IMF extends financial support to the poorest nations. And today I will tell you about the surcharge system which the IMF uses to make it even harder for those nations to repay the already onerous debt obligations that the IMF imposes on them. These surcharges are just another component of the IMF’s extraction system which transfers wealth from the poorest nations to the richest. I have long advocated the abolition of the IMF and a replacement, multilateral institution being created that actually works to help reduce poverty and the redistribute resources from endowed to less-endowed nations without any harsh austerity measures. The challenge is how would that work. I will write more about my ideas on that in due course. But the evidence keeps mounting to justify the abolition. The surcharge system is one part of that evidence suite.

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The ‘MMT is dead’ crowd are silent now the yen is appreciating

It’s Wednesday and I am mostly thinking about Japan today. In just over a week’s time, I will once again head to Japan to work at Kyoto University. I will be there for several weeks and will provide regular reports as I have in previous years of what is happening there. The LDP leadership struggle is certainly proving to be interesting and there is now a view emerging that the hoped for break out from the deflationary period has not happened and further fiscal expansion is necessary. This is at a time when the yen is appreciating and the authorities are worried it is making the external sector noncompetitive. That is, light years away from the predictions made by the ‘MMT is dead’ crowd when they saw the depreciating yen during 2022 and beyond. It just goes to show that trying to interpret the world from the ‘sound finance’ lens will generally lead to erroneous conclusions.

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The 20 EMU Member States are not currency issuers in the MMT sense

For some years now (since the pandemic), I have been receiving E-mails from those interested in the Eurozone telling me that the analysis I presented in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – was redundant because the European Commission and the ECB had embraced and was committed to Modern Monetary Theory (MMT) so there was no longer a basis for a critique along the lines I presented. I keep seeing that claim repeated and apparently it is being championed by MMT economists. While there are some MMTers who seem to think the original architecture of the Economic and Monetary Union has been ‘changed’ in such a way that the original constraints on Member States no longer apply, I think they have missed the point. They point to the fact that the ECB continues to control bond yield spreads across the EU through its bond-buying programs (yes) and that the Commission/Council relaxed the fiscal rules during the Pandemic (yes). But the bond-buying programs come with conditionality and the authorities have now ended the ‘general escape clause’ of the Stability and Growth Pact and are once again enforcing the Excessive Deficit procedure and imposing austerity on several Member States. The temporary relaxation of the SGP rules (via the general emergency clause) did not amount to a ‘change’ in the fiscal rules. Indeed, the EDP has been strengthened this year. The Member States still face credit risk on their debt, still use a foreign currency that is issued by the ECB and is beyond their legislative remit, and are still vulnerable to austerity impositions from the Commission and their technocrats. To compare that situation with a currency-issuing government such as the US or Japan or Australia, etc is to, in my view, commit the same sort of error that mainstream economists make when they say that ‘the UK is at risk of becoming like Greece’ or similar ridiculous threats to discipline fiscal authorities in currency-issuing nations.

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British House of Lords Debt Report starts with false premises and then just repeats conventional fictions

On Tuesday (September 10, 2024), the UK House of Lords Economic Affairs Committee released their first report for the Session 2024-25 (HL Paper 5) – National debt: it’s time for tough decisions – which was the result of their decision to hold an inquiry – How sustainable is our national debt? – into whether “UK’s national debt is on a sustainable path” and whether “the Government’s fiscal rule regarding the national debt is meaningful”. They didn’t need a large-scale investigation to come up with answers to those questions: Yes and Not meaningful- are my answers based on the reality of the currency status of the British government.

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British GDP growth depends on the current fiscal position – a fact that is being forgotten

It seems that since they were elected British Labour, principally the Leader and Chancellor, have thought it necessary to put out ever increasing messages of doom and the need for tough fiscal action – aka austerity – despite them claiming when they were wooing the electorate that they would not pursue that ‘Tory’ option. Of course, they pulled the old stunt that once they were in office and had access to the ‘books’ they discovered, surprise surprise, that the state of government finances were even worse than they had imagined and that meant it was all to play for, which justified them taking tougher than planned actions. Every week passes since, it seems, when the tough talk gets tougher and core promises are abandoned. Tory policies that are the anathema of a progressive policy stance – such as the two-child benefit cap – will remain. And other Tory policies that were more ‘Labour like’ in nature will go – such as the Winter Fuel Payment received subsidy – will be severely cut back. There are many criticisms that I have made of the Chancellor’s stance (see previous blog posts) based on the absurdity of constructing the British government’s finances as equivalent in principle to the finances of a household issue. But, in addition to those more elemental issues, there is another matter that I have not seen addressed by the mainstream media nor the actual politicians relating to the proposed austerity. The whole discussion appears to be waged in a vacuum – context free. It is as if the current policy position, which the Chancellor claims is shocking and unsustainable, is divorced from the current broader economic reality in Britain. And that construction means that poor policy decisions will be made that will damage the material prosperity of the nation.

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Germany continues to kill the Eurozone

Earlier this week, the German statistical agency, De Statis released – Press release No.316 of 19 August 2024 – which confirmed that Germany continues to run policy settings that undermine the viability of the common currency. During the pandemic, Germany’s trade surplus declined significantly and the mainstream commentariat all pronounced that Germany had shifted direction and had finally learned that running an obsessive, export-led strategy that relied on suppression of domestic demand and increasing trade deficits elsewhere was fraught. Such a strategy had ensured the GFC was worse in Europe than elsewhere. The problem with that narrative is that it was wrong. The declining trade surpluses were driven by the temporary cost increases (mostly energy) that followed the pandemic and the price gouging by OPEC. The latest trade data shows that the economy has absorbed those shocks and is once again moving into large export surpluses that not only violate EU rules but also will further promote defensive strategies among its trading partners.

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Japan exports up sharply as a response to the weaker yen

It’s Wednesday, so a few topics. Tomorrow, I plan to address the issue that the US economy is heading into recession. The short assessment is that it doesn’t look like it to me despite the relatively poor labour market data that came out at the end of last week. But there is certainly a lot of fluctuating fortunes being recorded around the globe at present. Recent Japanese data is quite interesting and I discuss it in what follows. We should also remember that yesterday was the anniversary of the Hiroshima bombing – a very sad day in human history. Constantly reminding us of the damage that the US bombing caused should warn us off war altogether and nuclear weapons and technology specifically. Unfortunately, the trends are working against such a view. And we also have some music to listen to while cogitating over those issues.

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The Bank of England does not need a tiered reserve system for the Government to avoid austerity

There is an interesting debate going on in the UK at present about the concept of tiered bank reserves. The concept is now being used by commentators to argue that the new British government does not need to inflict the austerity that the Chancellor has now announced (even though she is denying that is what the government is up to) because the government can simply reduce outlays to the commercial banks in order to meet the fiscal rules. The discussion is rather asinine really and features all the missteps that commentators make when trying to appear progressive but falling into the usual mainstream macroeconomic fictions.

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British Chancellor fails the basic test – language is meant to impart meaning

Language is meant to bring meaning to discourse. That means we want to use terms that convey information that is of use to us in making our way in the world. The problem is that economists have perverted that process and introduced a metaphorical language that is intended to persuade the reader/listener to accept a particular view of the world but which undermines their ability to actually understand the phenomenon in question. Marx knew long ago how language could be constructed to advance the interests of the ruling class. The mainstream economics commentary that is also used by politicians falls into this category. Terms are used that have no meaning in an elemental sense but provide support for ideological agendas. We, the public, allow that to happen because we are ignorant about the context. It becomes a vicious cycle of lies and fictions which undermine human and environmental sustainability but certainly transfer income to the top-end-of-town. A recent path setting address to the House of Commons by the new Chancellor is a classic example of this reality denial.

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MMT and international trade – some further considerations in a degrowth context

One of the undercurrents at the recent UK MMT Conference in Leeds was the apparent unwillingness of MMT economists to acknowledge their mistake in dealing with international trade. In our new book – Modern Monetary Theory: Bill and Warren’s Excellent Adventure (published July 2024) – we devote a chapter to this issue. There are various strands to the criticisms we receive ranging from claims we are simply wrong at the most elemental level to others claiming trade has no part in the MMT framework. All miss the point and I am surprised people have tried to make a ‘career’ (or advance their egos) on this issue. As I have noted several times in the past, the issue is nuanced but the elementary facts are not. I am now working on a section for my new book (with Dr Louisa Connors) on ‘degrowth’ and system viability from an MMT perspective and so I am linking the trade aspects of MMT with this narrative to provide further clarification of how nuanced this area of discussion can be. Here is a little glimpse of that work.

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The new British Labour government will have to abandon its fiscal rule or deliver very little

It’s the Wednesday pot-pourri – British politics, self promotion, events, sport and music. Politicians invariably claim that the situation they inherit when they take office following an election is untenable and that the ‘public finances’ are worse than they had initially thought. Of course, the idea that ‘public finances’ can be good or bad or somewhere in between is a misnomer and just reflects the ignorance of the fiscal capacity that governments have (that is, currency-issuing governments). There is no such thing as a deteriorating public finance situation. So when Rachel Reeves got up after being elected the new Chancellor of the UK she was just posturing and telling the British people that they should not expect much better than what the Tories delivered. What can be good or bad or somewhere in between is the state of public infrastructure and public services. And after 14 years of devastating Tory rule, one can safely conclude that there is a huge deficit in the UK in that context. The question then is what can be done about it. My reading of the situation is that if Labour want to actually improve things significantly in terms of public service provision and the viability of Britain’s infrastructure then it will have to abandon its mindless fiscal rule. And it would be better that they do that quicksmart while they enjoy such a large domination of the Parliament.

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Degrowth and Japan – a shift in government strategy towards business failure?

I am briefly in the UK (arrived Tuesday and returning to Melbourne early Friday). We are officially launching our new book – Modern Monetary Theory: Bill and Warren’s Excellent Adventure – later this morning at the UK MMT Conference in Leeds, England. I am avoiding many of the sessions to reduce Covid risk, given the lecture theatres do not seem to have been refitted with modern ventilation. But from what I can see the Conference is well attended and going well. I should add that I had nothing to do with the organisation of the Conference but as usual I thank those who have put time to build an event that focuses on the work that I am part of. Anyway, a whirlwind trip this time. Today, though I reflect on the latest developments in Japan with respect to its ageing and shrinking population and how that impacts on business viability and skill shortages. All part of my research on degrowth strategies.

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Season 2 of our Manga – The Smith Family and their Adventures with Money – available now

Today (July 12, 2024), MMTed releases Episode 1 in the Second Season of our Manga series – The Smith Family and their Adventures with Money. We have spent the last several months developing the storylines and graphics and Season 2 will run from today to December 6, 2024 with episodes appearing on a fortnightly basis.

Have a bit of fun with it while learning Modern Monetary Theory (MMT) and circulate it to those who you think will benefit …

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ECB estimates suggest meeting current challenges will be impossible within fiscal rule space

In the recent issue of the ECB Economic Bulletin (issue 4/2024) there was an article – Longer-term challenges for fiscal policy in the euro area – which demonstrates why the common currency and its bevy of fiscal rules and restrictions is incapable of meeting the challenges that humanity and the natural world face in the coming years. The ECB article is very interesting because it pretty clearly articulates the important challenges facing the Member States and provides some rough estimates of what the fiscal implications will be if governments are to move quickly to deal with the threats posed. However, it is clear from the analysis and my own calculations that significant austerity will be required in areas of expenditure not related to these challenges. Given the current political environment in Europe, it is hard to see how such austerity can be imposed and maintained in areas that impact the daily lives of families. What is demonstrated is that the architecture of the EMU is ill-equipped to deal with the problems that Member States now face. The common currency and fiscal rules were never a good idea. But as the challenges mount it is obvious that Europe will have to change its monetary system approach in order to survive.

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Bank of Japan is making losses on its balance sheet – so what?

Sometimes when I am reading some story or analysis about the economy I sense a sort of glazing over effect – I just read the words as they appear on the paper and it is not until after I have read the entirety that I sort of have to pinch myself and realise that this is an attempt at serious journalism. The realisation that I have just read the most extraordinary nonsense that one could devise to present to readers then sinks in. I then wonder how a journalist could be so stupid as to actually construct and article in that way and seek so-called ‘expert’ commentary from an array of highly paid economists and bankers to support the nonsense. Who are they trying to fool? Well almost everyone is the answer. Why does this sort of journalism continue other than the lurid headlines sell products and that is what journalism has really become? I don’t accept that all these characters are part of a massive conspiracy to deceive the rest of us. Obviously, some of the players know clearly that they are manipulating the truth to advance their own agendas – like when bank economists continually claim interest rates have to rise (which they know will just boost the profits of the companies they work for). But the better way of thinking about this mass deception is that we have all been captured by the fictional world created by economists, who themselves are mostly trapped by the Groupthink that is impressed on them during their university days. Whatever the explanation, it still amazes me how stupid we all are for accepting this nonsense as serious commentary.

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